Crypto investors have been put on red alert in 2022. In 2021, one couldn’t have predicted the utter chaos that this year would produce. Companies are imploding left and right due to mismanagement and shady dealings behind the scenes. FTX is the most recent and most notable example. But, there could be a new company to worry about in Grayscale. The crypto asset management institution has all the warning signs of a company in distress.
Grayscale is a crypto investing company that’s proven itself to be a juggernaut in the space. Founded in 2013, it’s one of the oldest companies in its niche. It’s also one of the largest, beginning 2022 with over $43 billion in assets under management. After adding several products throughout the year, it now has 17 different funds in which clients can invest in.
But aside from its size and diversity of offerings, the company has come into the spotlight for taking on the Securities and Exchange Commission (SEC) head-to-head. Grayscale has been attempting for years to introduce the first Bitcoin (BTC-USD) Exchange-Traded Fund (ETF) to Wall Street. After being struck down in June once again, the company filed a lawsuit against the SEC.
It’s far more common for the SEC to sue a crypto company, rather than the other way around. So, investors are paying especially close attention to the case. If successful, Grayscale could be the first to offer a Bitcoin spot ETF, rather than the futures products which exist today.
This expansion and willingness to pour money into a lawsuit might suggest that Grayscale is doing well financially. Yet, as news continues to surface about the company’s business operations, that may not be the case. In fact, Grayscale might be turning into the next FTX story.
Grayscale: Crypto Powerhouse or FTX in the Making?
One could have seen FTX’s collapse coming; the writing was on the wall. Sam Bankman-Fried admitted to over-licensing his company to give a false sense of security. Back in August, before this unfolded, the company received a cease-and-desist for claiming it was Federal Deposit Insurance Corporation (FDIC) certified. Analysts showed that the on-chain data was there to prove Alameda Research was in financial trouble earlier in the summer, and that FTX bailed it out with customer funds. As stories regarding Grayscale’s inner turmoil bubble up, investors are left to ponder whether they’re watching another implosion in the making.
The market hasn’t been kind to the company, that’s for sure. While Grayscale began the year with $43 billion in assets under management, another look at the company’s portfolio shows a drastic decline. Across its 17 products, the company holds just over $15 billion now.
Grayscale is also obviously noting the deep price plummets wreaking havoc on these products. Grayscale’s Ethereum (ETH-USD) trust has seen a 43% downturn since FTX’s implosion began. Its Bitcoin trust has dropped 50%. These losses have led to the company getting slammed by industry analysts for poor structuring, and it has closed all share redemptions to clients.
Being hit by crypto winter doesn’t automatically mean Grayscale is failing. Quite literally every company in the space is beholden to market ebbs and flows. But, there are other signs that point to difficulties facing Grayscale. Particularly, there is the recent news that Grayscale sister company Genesis owes $1.8 billion in debts to its clients.
Genesis Debt and Inter-Company Bailouts Do Little to Put Investors at Ease
Genesis confirms that $900 million of this debt belongs to Gemini, who partnered with the company on an “earn” product. Another $900 million is owed to other creditors. And, the company still owes more money which hasn’t been disclosed yet, including funds owed to bankrupt companies Celsius and Voyager Digital.
In the wake of this increasing debt figure, Genesis has halted withdrawals from its platform as well. In addition, it has hired a restructuring professional to help it avoid bankruptcy. So, putting the pieces together, the company’s $1 billion emergency loan request seems like it was more of a desperation play than an investment.
Genesis and Grayscale are sibling companies — both owned by Digital Currency Group (DGC). This, coupled with the massive debts plaguing the companies, certainly draws similarities to the FTX and Alameda relationship which, behind the scenes, ran far deeper than investors could have known. Grayscale and Genesis assert that the relationship between the two stops at their owner. However, with Grayscale refusing to share proof of its asset reserves in the aftermath of FTX, skepticism is able to fester.
As it stands now, both Genesis and Grayscale are in deep trouble. Genesis has its own debt to deal with, and Grayscale is in financial disarray. DCG even owes $1.7 billion to Genesis for assuming liabilities related to the latter’s exposure to Three Arrows Capital. Analysts at Bernstein have suggested that now, there is nowhere for the companies to go without parting out assets or dissolving Grayscale’s Bitcoin trust to cover all of these debts.
Simply put, there’s a lot going on for Grayscale and its related corporations. And, if there’s anything FTX has taught investors, it’s that they should remain suspicious. There’s a lot of debt plaguing the companies. Moreover, there’s a resistance toward transparency which is obviously concerning given recent events.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
