JUICE
JUICE 6 minutes reading from Bitcoin

Here’s What Coinbase Custody Can Prove They’re Still Alive But Don’t Know Yet

Can't be too confident

@Grayscale needs to prove their backing of GBTC (entirely)

is 1:1 BTC in Coinbase Custody

If @GenesisTrading cannot meet withdrawals and have holes, either DCG may need to start liquidating their biggest holdings: GBTC, ETHE

3 Scenarios:

First of all, I have looked into the product before, but there may be information I am missing or just don't understand fully

And there will be lots of highly unlikely assumptions so take it with a grain of salt

First for those who don't know, short mechanism of GBTC:

1. When Private Placement is open, accredited investors can own share of GBTC representing BTC 2. GBTC can also be traded in the OTC market

Currently, Coinbase is also supporting Grayscale convert GBTC into spot ETF

I think @Riley_gmi covers most of the story that I was thinking too so go read his tweet first

Twitter

Key point is: 1. If Genesis is unable to provide withdrawals 2. DCG (who has a history of absorbing Genesis losses) will also need to liquidate some assets to provide fresh capital, AGAIN 3. DCG will most likely sell big assets they hold - such as GBTC

But GBTC is trading at a huge discount, therefore, selling current holdings is a simple net -40% loss

Then Grayscale has 2-3 options:

Some are highly unlikely, some are "possible"

1. Just sell all GBTC through OTC with -40% discount

(Unlikely) 2. Close Grayscale GBTC service and allow full redemption of all BTC (Unlikely) 3. Allow initial investors who were offered the product option to redeem a portion of the GBTC shares into BTC (Partially likely)

The current reasoning of the discount is because capital that flows into Grayscale are hard to pull out

If you hold GBTC, the only way out into USD or BTC is by selling GBTC OTC - which there is very low demand for since Coinbase already supports institutional clients

Redemption is simply not possible - causing constant discounts and also the vigorous effort of Grayscale to convert it into a Spot ETF

If (atleast) partial redemptions become available, then the discounts will work as a very attractive opportunity for arbitragers

However, take into account: Redemption X = GBTC discount ↑ BTC Sell Pressure X Sentiment ↓ Redemption V

= GBTC discount ↓

BTC Sell Pressure ↑↑ Sentiment ↓↓

Ryan Selkis 🥷 on Twitter

But this is relatively a smaller issue compared to what may "potentially" be a problem

Highly unlikely as Coinbase is a listed company and Grayscale uses Coinbase Custody for the assets - but everything is possible so far

We need @coinbase Custody to prove there is a full backing of native BTC per appropriate share of GBTC

Whichever format of audit or proof they can provide, at this moment, it is crucial for Coinbase to give users confidence that there is actually backed BTC in the custody

Obviously, Coinbase would have never lent these assets out for yield - but we technically don't know the address of the custody - so we never know

So was @FTX_Official they technically couldn't have touched user funds too

Grayscale on Twitter

Stuck in a very odd situation: Redemptions X - then we never get to know if its fully backed Redemptions V - we get to see how much is actually backed - but now we have native BTC sell pressure in the market

It's a double-edged sword

Also some are not even SEC reporting so whooo knows

This is assuming a bunch of stuff that is very hard to prove and highly unlikely DCG or Coinbase or Genesis has chances of ending up like @SBF_FTX but we never know

The link to the SEC filing of GBTC is here:

This post is based on this twitter thread.

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