The world's largest bitcoin fund is increasingly coming under the dark cloud of the FTX crash. For its part, crypto asset manager Grayscale is backed by the powerful Digital Currency Group.

«Buy the dip» is age-old investment advice. Despite all the market uncertainties, Cathie Wood is sticking unflinchingly with crypto. Revered by her fans as the «world's best investor», the US fund manager with connections in Switzerland is taking advantage of cratering prices in the crypto universe to go on a buying spree.

Ark Makes Big Purchases

The investor has bought over 1.3 million shares of US crypto exchange Coinbase with her fund firm ARK Invest since the beginning of November, according to a «Bloomberg» (behind paywall) report. ARK vehicles have also increased their holdings in cryptocurrencies, with the ARK Next Generation Internet fund amassing more than 450,000 shares of Grayscale Bitcoin Trust (GBTC) since the beginning of last week.

Grayscale is the world's largest cryptocurrency asset manager. But as with the extensive GBTC purchases, Wood seems to be rather alone at the moment, with the renowned bitcoin trust increasingly in the investor spotlight as sister company Genesis Global Capital is the next crypto company to falter due to the contagion effects of the FTX bankruptcy.

Genesis Wavering

Although Genesis has denied that it is insolvent, the market speculates otherwise. The crypto broker acts as a liquidity provider for Grayscale's leading bitcoin investment fund, among others, and Genesis' lending business already ran into trouble when crypto hedge fund Three Arrows collapsed.

Wood's investment firm Ark did acknowledge the potential impact on Genesis Trading in its recent newsletter on the FTX debacle, warning other counterparties could be next. Still, it reaffirmed its belief in decentralized and transparent public blockchains as strong as ever.

Discount to Bitcoin Spot Prices

Investor uncertainty and distrust of crypto assets such as Grayscale's Bitcoin Fund, the world's largest, manifested itself in a temporary record trading discount of up to 50 percent. GBTC currently trades at a significant discount of nearly 43 percent to its net asset value. Since the beginning of the year, the share price has fallen almost 76 percent.

To be sure, the investment vehicle has been trading at a discount to the bitcoin price since 2021, one that has visibly widened as the market tumbles. Given the huge divergence, the largest institutional investment vehicle on the market is coming under increasing critical scrutiny. Not least for the reason that the fund manages nearly $10 billion in assets.

Consequences Unclear

By itself, a big discount alone is not an indication the fund will have to be liquidated anytime soon. But it does highlight the uncertainty among investors. It is unclear how Grayscale could be affected by a possible Genesis bankruptcy. Accordingly, the asset manager is also under pressure.

In a blog post Friday, the company assured investors that all digital assets in Grayscale's products are held by Coinbase Custody Trust Company. It went on to say that organizational documents which govern each of Grayscale's digital investment products, as well as the custody agreement with Coinbase Custody, prohibit the lending, borrowing, or otherwise encumbering the digital assets underlying the products.  Financial analysts have also since thrown their support behind the company.

Has DCG Been Infected?

Market skepticism persists with Grayscale's ownership contributing to some extent. After all, the reeling broker Genesis, as well as Grayscale, belong to the Digital Currency Group (DCG), regarded as one of the most powerful companies in the crypto world,  billing itself the epicenter of the bitcoin and blockchain industry.

From an investor's perspective, it is to be hoped that the company's slogan does not prove to be a portent. After all, investors are increasingly wondering these days how badly DCG, which was founded by Barry Silbert in 2015, has «caught on» in the wake of the FTX debacle.

Wide-Ranging Network

Under the umbrella of the parent company is, among others, the media out Coindesk, which in early November published a report questioning the stability of FTX founder Sam Bankman-Fried's corporate empire and was the proverbial snowball that triggered an avalanche.

DCG is also the parent of crypto mining services provider Foundry Digital and crypto exchange Luno, to name just a few subsidiaries of the venture capital firm. It also holds dozens of other investments and crypto positions in its portfolio.

Closely Followed in Switzerland

The Grayscale case is interesting because the company sued the US Securities and Exchange Commission (SEC) earlier this year after the SEC rejected its plan to convert GBTC into a spot bitcoin ETF. The regulator has so far only approved derivative-based products. According to Grayscale, converting GBTC into an exchange-traded fund or bitcoin ETF would close the trust's discount.

This story is also being closely followed in Switzerland. In mid-November, the SEC took under consideration whether a spot Bitcoin exchange-traded fund from Cathie Woods Ark Invest and Swiss crypto investment product firm 21Shares would be allowed to list and trade on Chicago's Cboe Global Market exchange.

The SEC extended the window for approval or rejection of the crypto investment vehicle one more time, until January 27.