Crypto asset manager Grayscale has come under fire after bitcoin saw a significant decline in the wake of the Securities and Exchange Commission’s (SEC) decision to green-light 11 spot bitcoin ETFs earlier this month.
It was hoped that the SEC’s decision would see a bitcoin price pump. However, Wall Street’s “buy the rumor, sell the news” adage was once again proved right and instead of pumping, bitcoin has sold off 15% since pre-approval highs.
The Grayscale Bitcoin Trust (GBTC) was the first scapegoat in sight. Once the world’s largest hoard, it consistently amassed bitcoin for a decade before it turned into a top bitcoin seller overnight.
According to venture capitalist Adam Cochran, GBTC could theoretically sell bitcoin for weeks to come. Indeed, using a simple extrapolation of GBTC’s trailing rate of sales, Cochran noted that it could sell every day through mid-March.
His prediction, of course, assumes that GBTC will sell all of its 536,694 bitcoin. As an ETF that must not only sell but also buy to track the USD price of bitcoin, this is highly unlikely.
Cochran also leaves unspoken the obvious truth that Grayscale is a passive, not active, manager of GBTC’s bitcoin. In other words, Grayscale’s traders don’t make discretionary choices about when or how much bitcoin to buy for GBTC. On the contrary, GBTC simply buys and sells sufficient bitcoin to match its promised ratio of 0.00089382 bitcoin per GBTC.
Throughout the day, as investors choose to buy or sell GBTC shares, Grayscale simply makes daily bitcoin purchases and sales to maintain that ratio.
In other words, other investors are deciding to sell their GBTC shares, as well as their bitcoin at lower USD prices. Altogether, their choices force Grayscale as the passive fund manager to sell enough of GBTC’s bitcoin to maintain the ratio 0.00089382 bitcoin per GBTC.
All a big misunderstanding
This simple reality, however, earns few impressions on X (formerly Twitter). Instead of a pragmatic understanding of passive ETF management, claims about Grayscale’s role as a massive bitcoin seller take center-stage.
Grayscale founder Barry Silbert hasn’t done anything to bolster his credibility by deleting a bunch of old tweets. Worse, a New York Attorney General lawsuit in October 2023 claimed that Silbert lied and schemed to defraud stakeholders in defunct crypto interest-earning program Gemini Earn.
Bitcoin has slumped from above $49,000 on January 11 to approximately $40,000 at press time. Many investors believed that the ETF approval would precipitate a windfall of retail and institutional purchases. Instead, existing bitcoin investors mostly just reshuffled between investment products.
Now that GBTC has been converted into an ETF, it’s required to have its bitcoin holdings track the value of outstanding shares as closely as possible by buying or selling bitcoin on spot markets. Grayscale swaps bitcoin for USD via Coinbase, for example. It’s unlikely to sell 100% of its bitcoin unless shares or bitcoin literally go to $0.
It’s somewhat irrelevant, therefore, that Grayscale could sell bitcoin at its current rate into mid-March. Far more relevant to investors is that Grayscale is a passive fund manager.
In all, Grayscale’s bitcoin sell-off was a convenient, albeit illogical scapegoat for angry bulls. In reality, Grayscale is a passive ETF manager and doesn’t make discretionary trading decisions. As such, it’s unlikely to have any causative effect on bitcoin’s USD price. It must simply buy and sell bitcoin to preserve its promised bitcoin/GBTC ratio.