FTX Sells Off Grayscale Shares, Triggering Bitcoin Price Movement

FTX’s massive selloff of GBTC shares has triggered a major outflow for one of the leading ETF issuers. Grayscale sold off major bitcoin reserves in response, triggering industry-wide price fall.

With the Bitcoin ETF finally approved and sales underway, the defunct exchange FTX has shaken up the market by selling off one billion dollars worth of shares in Grayscale’s Bitcoin Trust.

The start of 2024 has proven a hectic period in the world of Bitcoin. A protracted struggle with US regulators over the topic of a Bitcoin Spot ETF finally reached its climax on January 10, when the SEC approved this new financial instrument. Obviously, this long-anticipated event was immediately met with jubilation from the broader community, and bitcoin saw a spike in valuation in the immediate aftermath. This price action, however, did not last. Just as quickly as it came on, the upward spike for bitcoin trended down instead, with the price cratering by around 20% by January 23. Considering the scale of this previous victory, this market trend seems completely baffling at first glance. Bitcoin has seen a huge success, and now there is no shortage of pundits proclaiming a bear market? What could explain this?

It turns out that players from previous crashes in Bitcoin actually bear some responsibility for this current downturn. The exchange FTX, which previously had occupied a spot as one of the most successful crypto exchanges worldwide, crashed and burned in late 2022 due to a massive fraud scandal that saw many of its executives arrested. The legal proceedings against FTX also included a series of substantial debts and monetary penalties, which the company is obligated to pay by liquidating its assets. Now that the ETF has been approved, FTX saw the opportunity to sell off its entire supply of shares in Grayscale Bitcoin Trust (GBTC), earning a substantial windfall in the process. Although FTX’s 22 million shares in GBTC were appraised at a value of $597 million in a 2023 bankruptcy court, the brief spike in Grayscale’s stock price caused these shares to be worth $1 billion at time of sale. 

It may seem at first that this was simply a shrewd business decision from FTX, hoping to make the most of their assets to satisfy the terms of their bankruptcy. However, there are several factors at play that put a target on Grayscale’s back. First of all, it’s worth exploring the firm’s background, especially compared to some of the other major ETF proponents. Grayscale is a digital asset management company, founded in 2013, and managing tens of billions’ worth of assets through years of careful investment. Some of the other leaders, like BlackRock and Fidelity, are more general-purpose investment companies; each bearing decades of experience and trillions of dollars in assets. These major players in the world of traditional finance have seen that Bitcoin is extremely profitable, and they want in on the ETF.

Grayscale has several advantages over some of these competitors, however, due to its nature as a native to the digital asset space. Not only do they hold nearly 30 times the bitcoin that either BlackRock or Fidelity holds, but they also have a unique opportunity from the ETF approval: although most ETF issuers have had to create their own after the SEC’s greenlight, the pre-existing GBTC was able to be directly converted into an ETF. If Grayscale’s competitors have no way of easily surmounting these advantages, why not use overwhelming force? Nate Geraci, president of The ETF Store, claimed the brand-new market was already “wildly competitive,” adding that “A traditional ETF issuer could quickly boost assets under management, gain business operating expertise, and also acquire some 'crypto street cred' by targeting the right crypto-fund native firm.”

In other words, if the right actor or actors applied enough pressure, there would be plenty of ways for a firm with trillions of dollars to its name to simply acquire these advantages from Grayscale. GBTC, the pre-existing trust that was converted into a spot ETF, has already been at the center of a previous clash with FTX. Alameda Research, a hedge fund associated with FTX, had an active lawsuit open against Grayscale until shortly after their massive sale. Alleging that Grayscale’s “self-imposed redemption bans” hindered FTX shareholders from selling off GBTC shares, Alameda sought an injunction against Grayscale in 2023. Now that FTX no longer holds any of these shares, the lawsuit has been dropped without fanfare. 

This is just a simple illustration of the way that Grayscale’s competitors can hinder its advantages. FTX led the charge in massive sell-offs of GBTC, but it was far from the only one: a generalized rout has led more than $2.8 billion in cash to leave this fund in the days since January 11. Although a substantial discrepancy in fees between Grayscale and its competitors is doubtless a contributing factor to this generalized flight of investor cash, FTX’s massive sale ensured an outflow on this scale. In response to the selloff, Grayscale has conducted a selloff of its own, dumping off around $2.1 billion from its bitcoin reserves. These actions, more than anything else, are in all likelihood the largest reason for bitcoin’s overall price decline.

So, Grayscale has taken it on the chin since winning the fight they started, and some of the competitor ETF firms stand to gain the most from it. The critical takeaway here, however, is that there are substantial gains to be made here. Although there are other possible contributing factors to bitcoin’s price slide, it seems clear that it’s the plight of Grayscale that caused the most panic in the market. And yet, some of the other ETF issuers like BlackRock and Fidelity have seen nothing like these doldrums. Quite the opposite; they’ve been earning billions off their new product offerings.

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Bitcoin has seen a period of several months of continued hype and jubilation at the prospect of a successful ETF, and one of the main pushers of the legal battle saw major setbacks at the summit of this hype. That’s bound to put a damper on any party. Various groups have profited immensely from one firm’s setback, however, and that’s been a recurring trait of Bitcoin as a whole. We do not need to merely claim that all of Bitcoin’s fundamentals are intact to make some sort of comeback, the reality is that these moves have been an unbridled success for several players. Even if the market has been shaken up, no single firm has ever had the power to permanently cripple Bitcoin’s rise. Besides, Grayscale itself is by no means defeated, as it continues its research into future opportunities even now. The events of January have proven quite shocking for a casual observer to the world of digital assets, but Bitcoiners have seen it all before. It’ll take a lot more than this to seriously hinder Bitcoin’s lasting triumph.