Renowned crypto firm Arcane Research has issued a warning to Bitcoin (BTC) and Ethereum (ETH) investors in light of the escalating events surrounding Digital Currency Group (DCG), Genesis, and Grayscale. In an article by analyst Vetle Lunde, the firm warns:
Investors should pay attention to the ongoing financial distress related to Digital Currency Group (DCG) as the outcome could severely impact crypto markets.
In the reasoning behind the warning, Arcane Research states that if DCG goes bankrupt, it could be forced to liquidate its assets. “This could force DCG into selling its sizable positions in GBTC and unknown positions in ETHE and other Grayscale trusts,” Lunde said.
Further, the analyst argues that a “natural, less liquidity-constrained” solution could be a Reg M solution that allows holders of Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust (ETH), and the other trusts to redeem shares at net asset value.
This would resolve the near-record NAV – the value by which the fund trades below the Bitcoin spot price. GBTC was trading at -45.35% yesterday, while ETH was at a NAV of -55.83%. Dissolution of the trust via Reg M would trigger tangible impacts on crypto markets, as GBTC comprises about 3.3% of the circulating BTC supply and 2.5% of the ETH supply.
Arcane describes the threat to the market in the massive arbitrage opportunities:
A Reg M would cause a massive arbitrage strategy of selling crypto spot versus buying Grayscale Trust shares. If this scenario plays out, crypto markets could face further downside.
In the long run, however, Arcane Research calls this scenario a positive event, as the crypto market is “finally relieved of the huge burden” caused by the “Grayscale widowmaker trade.” According to Lunde, this could even be the potential final market bottom event.
Bitcoin Facing Final Intrinsic Shock?
As NewsBTC BTC reported, the pressure on DCG is growing day by day. Earlier this week, Gemini founder Cameron Winklevoss published an open letter claiming that Barry Silbert’s DCG was using stalling tactics in bad faith. Winklevoss gave Silbert a deadline of January 8 to return the $900 million in Gemini Earn client funds.
If Silbert does not comply, this could culminate in the coordination of a voluntary DCG Chapter 11 filing, according to Arcane Research. In addition, Valkyrie Investments and $3.5 billion asset manager Fir Tree also took the stage.
Valkyrie made an offer to become the new sponsor and manager of GBTC while announcing the launch of an opportunistic fund to take advantage of GBTC discounts. Fir Tree has filed a lawsuit, presumably in a tactical move to hurt DCG’s valuation and reduce the likelihood of investment by third parties.
At press time, the Bitcoin price stood at $16,817, still lacking volatility.
Featured image from iStock, Chart from TradingView.com