Next Bitcoin Crash? Insight On Genesis’ $1.5 Billion GBTC Sale

9 months ago 51

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The crypto community has been abuzz with discussions surrounding Genesis’ intent to sell approximately 36 million shares of Grayscale Bitcoin Trust (GBTC), a move valued around $1.5 billion. This announcement stoked fears of a potential market downturn, reminiscent of the apprehensions following the FTX bankruptcy estate’s sale of over $1 billion worth of GBTC. However, a deeper dive into the situation and subsequent clarifications reveal a less dire scenario than initially perceived.

No, There Will Not Be A FTX-Like Crash

Genesis’ decision to sell a significant portion of GBTC shares is rooted in its recent financial challenges and legal entanglements. Sam Callahan, a Senior Analyst at Swan, initially highlighted the concern on X (formerly Twitter), stating, “The FTX bankruptcy estate sold more than $1 billion worth of GBTC… Another bankruptcy estate is planning to sell billions worth of GBTC soon – Genesis.” This statement underscored the looming specter of GBTC outflows impacting the broader Bitcoin market.

The GBTC in question primarily originates from two sources: Genesis’ undercollateralized loan to Three Arrows Capital (3AC), resulting in the acquisition of 4.7 million GBTC shares, and 30.9 million GBTC shares used as collateral for the Gemini Earn program. The latter’s involvement led to regulatory scrutiny and a subsequent $21 million settlement with the SEC by Genesis.

Adding to the complexity, an additional 31 million GBTC shares valued at $1.3 billion were earmarked for Gemini lenders, totaling nearly 67.1 million shares worth close to $3 billion ready for sale. This sizable liquidation plan fueled fears of a negative impact on Bitcoin’s market value due to increased GBTC outflows.

The prospect of this liquidation raised alarms over potential GBTC outflows and their impact on Bitcoin’s market value. However, Greg Schvey, CEO at Axoni, provided a critical perspective that shifts the narrative. Schvey emphasized the mitigating factor of in-kind repayments, stating:

The proposed Ch 11 settlement requires Genesis to repay creditors in kind (i.e., bitcoin lenders receive bitcoin in return, rather than USD). Much of the selling pressure from the sale of GBTC will be absorbed by the Genesis estate’s purchasing of spot BTC.

In-Kind Bitcoin Redemptions Are Key

This in-kind repayment mechanism is crucial for understanding why fears of a market downturn may be overstated. As Callahan later acknowledged, learning from Schvey, the key issue becomes the percentage of creditors who will choose to sell their BTC upon receiving it.

Schvey’s insights highlight that the in-kind distribution was a strategic decision to prevent long-term BTC holders from being forced into recognizing gains. “Notably, in-kind distribution was a priority negotiation topic to prevent long-term BTC holders from recognizing gains when receiving USD back,” he stated, suggesting a belief that a substantial volume of lenders may not immediately sell their received Bitcoin.

This detailed context dispels the initial fear mongering around Genesis’ GBTC sale. It highlights a concerted effort to mitigate adverse effects through in-kind repayments, a move that could stabilize market reactions.

At press time, BTC traded at $49,761.