Grayscale Steers Away From Proof-of-Reserves, Sparks Collapse Fear

Updated by Ryan James
In Brief
  • Grayscale refused to provide a proof-of-reserve for its Bitcoin citing security risks.
  • Grayscale's GBTC is trading at a record discount of 46%.
  • There are increasing speculations about the financial health of its parent comapny, Digital Currency Group.
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Concerns about Grayscale collapse have grown after the Bitcoin fund refused to publish its proof of reserves.

A Nov. 18 Twitter thread by the investment firm failed to douse rousing fears, citing security risks as why it couldn’t publish its wallets.

Speculations Surround Digital Currency Group

Fears of Grayscale collapse first surfaced after Genesis Trading announced that it was suspending the origination and redemption of loans.

Given that Digital Currency Group owns Grayscale and Genesis, concerns about its financial health have begun to grow. The crypto community speculated how this could affect Grayscale and its major product, GBTC.

Reports that Genesis failed to raise $1 billion before halting withdrawals also fanned the flames.

Grayscale Will Not Provide Proof-of-Reserve

According to Grayscale’s Twitter thread, it sets up a legal entity for each product. It said the regulations surrounding its digital assets products prevent the underlying assets from being sold.

It added that all the assets are custodied at Coinbase Custody Trust Company. The underlying BTC for the GBTC product solely belongs to it and not to Grayscale or its parent company.

But “Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.”

Meanwhile, crypto exchanges, like Binance, Huobi, and Crypto.com, have published their proof of reserves to win community trust.

Community Fears Grow as GBTC Trades at Record Discount

According to available data, GBTC is trading at a discount of 45.08% to the net asset value. This is a record low partly because DCG, the biggest holder, is currently facing fears of financial distress.

Grayscale GBTC Discount
GBTC Discount (Source: YCharts)

Joe Consorti, a market analyst, highlighted that GBTC public filings were unaudited. He said the firm’s accounting company Friedman LLP was fined by the SEC for failing to report “inaccurate financial statements.”

Also, famed crypto critic Peter Schiff said the record-low NAV indicates something else. According to him, GBTC probably lent its Bitcoin to a borrower who cannot repay.

Meanwhile, with holders such as 3AC and BlockFi dumping, Consorti noted DCG had been forced to buy back GBTC’s shares. While that has not mitigated the GBTC discount, it now means that DCG is facing a liquidity crunch.

For BeInCrypto’s latest Bitcoin (BTC) analysis, click here.

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