Many reasons have been put forward for the recent rather bearish-feeling sentiment in crypto-asset markets. Among them could be falling hash rates in the wake of Chinese government bitcoin mining crackdowns. Or it could be fears that Tether will soon face its “Wile E. Coyote” moment (see below).
Another bearish scenario could be the continuation of the “unlocking” of Grayscale’s Bitcoin Trust (GBTC) investments. Most institutional investors participate in crypto-asset markets through investment funds like GBTC which has accumulated 3.5% of total bitcoin circulating supply. As publicly traded trusts that report to the U.S. Securities and Exchange Commission (SEC), such trusts relieve investors of concerns about storage, custody and security of their holdings, but there is a catch.
According to SEC Rule 144, restricted securities issued by an SEC reporting company like GBTC are subject to a minimum holding period of six months. Nevertheless, until mid-February the demand for GBTC was so great that investors were buying the shares at a premium over native asset value (NAV) in the secondary market, and these premia sometimes exceeded 35% late last year, as investors gobbled up GBTC. But now those purchases are entering their unlocking phases. Since mid-April there have been 139,500 GBTC unlockings, and there remains a further 140,000 by mid-July, after which such selling pressure will subside.
According to this article by Bernhard Mueller a Tether confidence crisis would likely result in a black swan event and a re-shuffling of the whole crypto market. While there’s a chance that large players would counteract the crisis by buying back large amounts of USDT to restore the peg, or by successfully reassuring the market that all USDT can be redeemed at par, there’s no way to be sure that this will happen, unless you put a whole lot of trust in Tether and its affiliates. The article is worth a read for its detailed analysis of how the Tether-based ecosystem works.
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