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Could Grayscale be the next FTX? Signs of inner turmoil persist.


Crypto investors were put on red alert in 2022. In 2021, one could not have predicted the utter chaos this year would bring. Companies are imploding left and right due to mismanagement and shady dealings behind the scenes. FTX is the most recent and notable example. But, there might be a new business to worry about in Shades of grey. The crypto asset management institution has all the warning signs of a business in distress.

Grayscale is a crypto investment firm that has proven to be a juggernaut in the space. Founded in 2013, it is one of the oldest companies in its niche. It is also one of the largest, as of 2022, with over $43 billion in assets under management. After adding several products throughout the year, it now has 17 different funds for customers to invest in.

But beyond its size and the diversity of its offerings, the company stood out for taking on the Securities and Exchange Commission (SECOND) face-to-face. Grayscale has been trying for years to introduce the first Bitcoin (BTC-USD) Exchange Traded Fund (ETF) on Wall Street. After being invalidated again in June, the company filed a lawsuit against the SEC.

It is far more common for the SEC to sue a crypto company, rather than the other way around. Thus, investors pay close attention to the case. If successful, Grayscale could be the first to offer a Bitcoin spot ETF, rather than the futures products that exist today.

This expansion and willingness to pour money into a lawsuit could suggest that Grayscale is doing well financially. Yet, while news continues to surface about the company’s business activities, that may not be the case. In fact, Grayscale could become the next FTX story.

Grayscale: Crypto Powerhouse or FTX in the making?

We could have seen the collapse of FTX coming; the writing was on the wall. Sam Bankman-Fried admitted to licensing his company too much to give a false sense of security. In August, before that took place, the company received a cease and desist for claiming it was Federal Deposit Insurance Corporation (FDIC) certified. Analysts have shown that on-chain data is there to prove Alameda Search was in financial trouble at the start of the summer and FTX bailed it out with client funds. As stories about Grayscale’s inner turmoil simmer, investors must be wondering if they’re witnessing another implosion afoot.

The market hasn’t been kind to the company, that’s for sure. While Grayscale started the year with $43 billion in assets under management, another look at the company’s portfolio shows a drastic decline. Of its 17 products, the company now holds just over $15 billion.

Grayscale also obviously notes the deep price drop that is taking its toll on these products. Shades of grey Ethereum (ETH-USD) confidence has seen a 43% drop since the start of the FTX implosion. His confidence in Bitcoin dropped by 50%. These losses led the company to be criticized by industry analysts for its poor structuring, and it closed all stock buybacks to clients.

Being hit by the crypto winter does not automatically mean Grayscale fails. Literally all business in space is beholden to the ebbs and flows of the market. But, there are other signs that point to difficulties facing Grayscale. In particular, there is the recent news that Grayscale’s sister company Genesis owes $1.8 billion in debt to its clients.

Genesis debt and intercompany 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 a “win” product. Another $900 million is owed to other creditors. And, the company owes even more money that has yet to be disclosed, including funds owed to bankrupt firms Celsius and Voyager Digital.

As a result of this growing debt figure, Genesis also halted withdrawals from its platform. In addition, she hired a restructuring professional to help her avoid bankruptcy. So putting the pieces together, the company’s $1 billion emergency loan request appears to be more of a game of desperation than an investment.

Genesis and Grayscale are sister companies, both owned by Group of digital currencies (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 might have known. Grayscale and Genesis claim that the relationship between the two ends with their owner. However, with Grayscale refusing to share proof of its asset holdings in the wake of FTX, skepticism may fester.

As it stands, Genesis and Grayscale are in deep trouble. Genesis has its own debt to settle and Grayscale is in financial disarray. DCG even owes Genesis $1.7 billion for assuming liabilities related to the latter’s exposure to Three Arrows Capital. Bernstein analysts have suggested that now companies have nowhere to go without separating assets or dissolving Grayscale’s Bitcoin trust to cover all those debts.

Simply put, there’s a lot going on for Grayscale and its affiliates. And, if there’s anything FTX has taught investors, it’s to stay wary. There is a lot of debt plaguing businesses. Additionally, there is resistance to transparency which is obviously concerning given recent events.

As of the date of publication, Brenden Rearick had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Brenden Rearick is a financial news writer for InvestorPlace’s current market team. It primarily covers digital assets and tech stocks, with a focus on crypto and DeFi regulation.

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Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.
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