The crash of FTX cryptocurrency exchange has hit the crypto market hard. Not only has it greatly affected retail investors but also large market players who had invested their funds with FTX or who had invested largely in native tokens. The scale of the aftershock caused by the manipulation of the founder of FTX, Sam Bankman-Fried, has not yet been felt but when it is finally felt in all its glory, it may shake markets for a long time to come. One thing is clear, the crypto market has suffered a severe blow to its reputation and it is likely to divert large amounts of money from the industry.
The situation with Grayscale investment trust stocks (GBTC) is widely being debated now as this fund is one of the cornerstones of the crypto market and these stocks are used as alternatives to direct investments into crypto assets. These stocks are largely correlated with Bitcoin prices but are trading 45% off the asset’s net value.
Digital Currency Group (DCG), a parent company of Greyscale fund, suffered during the Terra bankruptcy as 3 Arrow Capital fund (3AC) received $2.5 billion from the collapse of GBTC. The market is now buzzing with rumours that DCG is in a lot of trouble as it borrowed money from its prime broker Genesis to cover the funds lost in 3AC’s bankruptcy. If the rumours are true then GBTC stocks may see a substantial dive and there will be no money left over to cover losses. That is not the worst-case scenario, the worst case would be if this dive also sweeps away the funds needed to cover clients’ claims. In this case GBTC and ETHE trusts should be liquidated in order to complete U.S. Dollar compensations to its clients. Trust has around 633,000 BTC and 3 million ETH. So, the pressure on prices would be very high.
Nobody can save DCG now after so many negative events have been linked to the crypto market over the recent months. “Traditional” large investment houses may believe that crypto investments are not worth the hassle. So, large capitals will shy away from crypto assets for a long term, at least before proper government regulations and supervision is introduced.
Bitcoin is trying to push through the $16,000 support level and continue to move towards $10,000 per coin. This downslide may last for quite a long time without, while the recovery would certainly take more than one year. The middle of 2024 could be a threshold for the crypto industry to start on its recovery path.