The world's largest crypto fund came into the FTX storm

The world's largest cryptocurrency funds are involved in turbulence that swirling around the battered sector, another sign of the declining enthusiasm for digital assets.

The share price of the $ 10.5 billion grayscale Bitcoin Trust (GBTC), which has 3.5 percent of the global bitcoins, has fallen to a discount of 39 percent compared to the value of its underlying assets, since investors try to get more and more desperate.

The blowout means that the investors of the trust have suffered a loss of 83 percent since the highlight of Bitcoin in November 2021 and thus exceeded the 74 percent loss of value from Bitcoin.

The trust in digital assets was shaken by the implosion of the FTX crypto exchange, the consequences of which, due to the complex and often opaque connections between the main actors, are shaken by the almost $ 1 billion.

The fears came closer to Grayscale on Wednesday than the crypto broker Genesis Trading, which last year loans of more than 50 billion crypto hedge funds that registered bankruptcy in July.

Grayscale and Genesis are both subsidiaries of the Digital Currency Group, a risk capital company based in Stamford, Connecticut.

Genesis acted as an authorized participant of GBTC, who was responsible for the issue of new shares until Grayscale introduced an internal broker dealer, Grayscale Securities last month.

The Digital Currency Group is also the largest shareholder of GBTC.

The central problem of GBTC is that it has been replaced by the advancement of better vehicles for the storage of Bitcoin.

When it came to the market as a private placement offer in 2013, it was one of the few of its kind, and when the crypto industry expanded, it quickly increased its number of shares to absorb the incoming flood of money.

According to Morningstar data, the net assets reached its maximum in October 2021 with USD 39.8 billion, and GBTC was permanently traded on the net inventory value.

However,

was undermined this year by the development of the first stock market traded Bitcoin funds in Canada. The fees of these vehicles were usually less than half of the 2 percent per year collected by GBTC. They also offered more liquidity and new investors did not have to pay a premium.

When the currents migrated from GBTC, demand and supply for his shares came out of balance, which pressed the share price on a strong tee against the NAV.

The underlying problem is that, unlike ETFs, there is no Arbizag mechanism in order to bring supply and demand back into balance.

GBTC shares cannot be redeemed against Bitcoin or cash and can only be sold to another buyer via free traffic. Grayscale would need an official approval to introduce a share buyback program.

Instead,

Grayscale hopes to convert GBTC into a “spot” bitcoin ETF that holds the “physical” currency. So far, these plans have been blocked by the US Securities and Exchange Commission that has refused to follow the example of the regulatory authorities in Canada and elsewhere and to approve Spot-Bitcoin ETFs, with regard to concerns regarding potential fraud and manipulation on the unregulated stock exchanges where trading takes place.

grayscale is currently suing the SEC on the right to convert GBTC. However, the increasing discount suggests that only a few market participants believe in success.

"If you succeed in gaining the legal proceedings, all investors would be healthy. The discount would be greatly erode because the [Share] process can be freely carried out," said Todd Rosenbluth, head of research at Vettafi.

Nate Geraci, President of The Etf Store, said: “The structure of GBTC is clearly suboptimal because shares cannot be withdrawn.

"It is very disappointing that the SEC continues to grant every small investor access to this fund, but does not approved a spot bitcoin ETF that would solve the discount problem. This is another example of the absurd regulatory dysfunction around the entire crypto ecosystem at the moment," added Geraci.

Some investors have kept the faith. ARK Investment Management, already the third largest shareholder from GBTC with a share of almost 1 percent, bought further shares worth $ 2.8 million this week

In October, Cathie Wood, Chief Executive from Ark said that GBTC would be traded at an "emergency sales price", since there is the possibility that it will be converted into an ETF at some point. Ark also tries to permit a spot ETF.

The second largest shareholder with 2.9 percent is blockfi, a crypto loan and trading platform that has set the withdrawal of customer deposits due to their "significant commitment" to FTX.

Peter Tchir, head of the macrost strategy at Academy Securities, made the prospect that Grayscale requests permission to buy a large amount of shares, then liquidate the fund and possibly achieve more than enough profit to compensate for the loss of fee income and to win external investors in the process.

However,

geraci believed that there was every chance that the discount will expand even further, "especially if there is another FTX attachment that affects the entire cryptor room".

Nevertheless, he suggested that GBTC is "clearly a better option than to keep Bitcoin on a stock exchange like FTX, since investors can act with the certainty that the underlying bitcoin is actually available".

In addition, Geraci believed that the FTX debacle strengthened the arguments for an official supervision of crypto exchanges and "theoretically accelerated the schedule for the approval of Spot-Bitcoin-ETF".

rosenbluth, however, thought that the SEC would see the fiasco as confirmation of its position.

"The SEC viewed Spot-Bitcoin as risky and is concerned about fraud and manipulation," he said. "I'm not sure if you will be surprised by these developments."