Grayscale and MicroStrategy struggles hint at hard times for crypto

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As of November 5, when Binance chief Changpeng Zhao (CZ) announced that the company will divest from its FTX investment by dumping FTT tokens, the crypto market collapsed.

Indeed, bitcoin has taken a 25% dive and many altcoins fared even worse with FTX-backed Solana spiraling 65%. The question now on everyone’s mind: is more pain in store for crypto markets? The FTX fallout has come in the middle of a huge patch of bearish sentiment across all markets but crypto is also facing wide and structural market deleveraging which is making companies go bust and coins go to zero.

Gradually, every fraud and scam in crypto seems to be collapsing as the leverage synonymous with bull markets turns into the margin call of the bear market.

Bizarre things are happening in the house of Barry Silbert

The Grayscale Bitcoin Trust (GBTC) is selling bitcoin for as low as $9,000 — or a 45% discount to the currency’s spot price. Meanwhile, crypto trader and lender Genesis Global Trading (also owned by Grayscale Trust owner, Digital Currency Group) has reportedly taken out a $1 billion emergency loan in recent days. It also announced that it will be halting redemptions.

Grayscale has issued a statement saying that its activities with regard to Genesis don’t affect the various Grayscale Trusts as these assets are held at Coinbase and can’t be lent out.

Genesis, which is basically a large bitcoin and crypto trading firm, may have had assets held at FTX but this isn’t clear according to its annual report. It registered $69 million in liabilities and $154 million in assets for 2020 and there are no filings yet for the succeeding year.

Andrew Watson, a UK investor in online payments systems has claimed without providing sources that the $1.1 billion loaned to Digital Currency Group by Genesis was hidden from investors. Grayscale hasn’t denied the claims so far. An on-chain analyst has verified 317,705 bitcoin of the reported 633,000 that Grayscale allegedly owns.

Genesis still has yet to confirm why it needs to take out an emergency loan but Grayscale could have also been impacted by the collapse of hedge fund Three Arrows Capital (3AC) as it had loaned it funds to buy GBTC shares.

The MicroStrategy margin call and the SilverGate fallout

In March this year, Silvergate Bank lent MicroStrategy (MSTR) $205 million to buy bitcoin. However, the details of the loan are a little bizarre, given that Michael Saylor once claimed that MSTR has custody of all its bitcoin, thus implying that Silvergate has no access to its collateral against which Saylor borrowed his money.

MSTR is heavily leveraged on bitcoin. It indebted itself to buy as much as $4 billion worth of the currency during the bull market and its investment is now worth 50% less, representing a loss of nearly $2 billion.

On the other hand, Silvergate seems to have a mountain of issues and unresolved questions. It’s surely been impacted by the FTX fallout as it owns various FTX bank accounts. Silvergate is also being investigated by the Brazilian authorities for laundering money from Latin American shell companies to the US. Infamous short-seller Marc Cahodes is arguing that it’s highly suspicious that Silvergate has transferred up to $1 trillion in assets with just $14 billion in clients’ assets registered.

The bitcoin mining crisis

Last month, after Protos reported that most publicly-listed bitcoin miners were down more than 75% and going through significant financial duress, Core Scientific, a major US-based miner claimed that it was considering bankruptcy. Crypto lender BlockFi risks taking an $80 million hit on Core Scientific’s bankruptcy, while Riot Blockchain also risks going heavily underwater as it keeps suffering consistent losses.

So far, Riot has survived by extracting shareholders’ value and selling stock. However, this option may not be ideal right now after multiple dilutions and a stock that is down more than 90% from previous highs.

Coinbase chief dumps shares

Coinbase CEO Brian Armstrong sold 29,732 shares last week at around $1.5 million. This is a relatively low amount considering that Armstrong owns up to 59.5% of the voting shares and last October committed to selling 2% of his shares in the next year.

However, selling Coinbase shares at last week’s prices also means selling them at around -85% from their launch price in November 2021 of $342. It’s hardly an encouraging sign that an insider would sell his stock so low compared to what the company was initially valued at. Does Brian Armstrong know something we don’t?

Bonus: Michael Burry is short

And finally, we don’t know how much of an indicator of crypto’s future troubles this could turn out to be, but given how bearish Michael Burry likes to trade, it was something of a surprise last week to hear him claim, “You have no idea how short I am.”

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