Trouble Mounts for Grayscale as Ethereum Trust Reaches New Low

Grayscale might be one of the crypto industry’s most reputable investing vehicles. Still, that doesn’t mean that the company is a safe haven for investors. Grayscale’s portfolio remains as endangered by the bear market as anybody else’s — in fact, it’s struggling to hold on right now. Grayscale’s parent company gets swept up in what some are predicting to be the next FTX in the making. Meanwhile, the unkind market has sent Grayscale’s already beleaguered products whirling. New lows for one of the company’s biggest crypto trusts provides enough evidence of that.

Trading at a price of $4.84, the Grayscale Ethereum Trust (OTCMKTS:ETHE) might seem like a bargain of a way to indirectly invest in Ethereum (ETH-USD). But, an ETHE investment is becoming less and less tied to ETH prices. Today, the trust is trading down by 60% relative to ETH prices, a new all-time low for the fund. Its primary trust, the Grayscale Bitcoin Trust (OTCMKTS:GBTC), is performing similarly poorly. GBTC, with a price of $8.20, is trading at a 45% discount to Bitcoin (BTC-USD) prices.

The new lows add to a tough period for Grayscale investments. In just a year’s time, the company’s total assets under management (AUM) has plummeted. At the end of 2021, the company’s AUM totaled $43 billion, making it a powerhouse for crypto futures trading. At the start of 2023, though, these assets have shrunk significantly. Across all 17 trusts and exchange-traded funds (ETFs), Grayscale’s AUM totals just over $14.6 billion — a decline of 66%.

Grayscale Trust Woes Add to Company’s Turbulence

Prices of ETHE and GBTC further disconnecting from their respective cryptos is bad news. But, there are other concerns Grayscale is focusing on right now, and the way these events fall into place could have a much more detrimental effect on the company than the bear market.

Take, for example, Grayscale’s fight against the Securities and Exchange Commission (SEC). In July of last year, the company filed a lawsuit against the SEC for rejecting its application for a spot Bitcoin ETF. The complaint comes after multiple rejections of this spot ETF product, which Grayscale calls an “arbitrary, capricious and discriminatory” decision. The company filed its opening brief on the complaint in October. Given that a central goal for Grayscale is in bringing a spot Bitcoin ETF to market, a win on its behalf could literally be a lifesaver for the institution. In the meantime, though, it is a money sink that doesn’t aid Grayscale through a period of turmoil.

There are also the meta issues plaguing Grayscale’s parent company, Digital Currency Group (DCG). DCG, which owns both Grayscale and crypto brokerage Genesis, is in deep debt to the latter company — over $1.6 billion. Genesis currently owes clients of Gemini’s exchange $900 million, and it desperately needs to find the money as Gemini applies more pressure to do so.

DCG is left with few choices as it navigates its precarious situation. One of these, suggested by Bernstein, is that DCG should dissolve and sell Grayscale’s Bitcoin Trust. Doing so would bail out DCG in the short term. However, it would lop off $10.4 billion in AUM for Grayscale and essentially destroy any long-term viability for the company.

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.