Photo: Yuki Iwamura/Bloomberg via Getty Images

This was supposed to be bitcoin’s comeback season. On January 11, the Securities and Exchange Commission approved a new way (for the U.S., at least) to invest in the digital currency, bitcoin exchange-traded funds. BlackRock and Fidelity — collectively managing about $15 trillion — were among the 11 issuers who got the nod from the regulator to build a bitcoin-focused ETF fund, a popular and easy-to-use investment vehicle. These ETFs didn’t change anything about the nature of bitcoin, its extreme volatility, or its lack of any real-world usefulness. But that didn’t matter. This was something like bitcoin’s big IPO — the moment the cryptocurrency really became investible for Wall Street. This had long been the digital-golden dream of the crypto set: the ability to make bitcoin available to everyday investors who knew and trusted ETFs and could now put it in a retirement account. Bitcoin to $1 million? Sure — why not?

Since then, among very high expectations of “number go up,” bitcoin has been doing little else but fall — hard. By Tuesday, it had fallen 20 percent from its recent peak, officially entering a bear market. Some of this could be chalked up to hype, but money has mostly been flowing into these new bitcoin ETFs — more than $10 billion altogether. Flowing into all them, that is, except one: the Grayscale Bitcoin Trust, which has been absolutely hemorrhaging money (and bitcoin) in the days since the ETFs began trading. The Grayscale Trust — a core part of the troubled Digital Currency Group — is one of the world’s largest holders of bitcoin, about as well known and respected as you can get in crypto world (which, to be fair, is grading on a pretty steep curve).

There are some wonky reasons that could partly explain why so much money is fleeing Grayscale — differences in fees, the vagaries of tax payments — but there’s one very big reason behind the collapse: convicted fraudster Sam Bankman-Fried.

No — Bankman-Fried is not trading bitcoin from jail, where he has apparently cornered the canned fish market. According to CoinDesk, what is left of FTX, Bankman-Fried’s crypto exchange, is selling off its assets in order to pay back people who have had their funds frozen on the defunct exchange for the past 14 months. When FTX collapsed in November 2022, that essentially froze about $3 billion worth of crypto that was being held on the exchange — including about $900 million worth of the Grayscale Bitcoin Trust. Since then, FTX’s new management has tapped Galaxy Digital, the hedge fund run by Mike Novogratz — the ex–Goldman Sachs trader with an unfortunate crypto tattoo — to sell off the Grayscale funds to give depositors back at least some of their money. And it makes sense that Galaxy would pick a time of maximum excitement to start selling. Not only do FTX customers need to get paid back, but the bankruptcy lawyers managing the company have racked up hundreds of millions of dollars in fees.

The ripple effect is not just limited to Bankman-Fried’s own companies, though. FTX was one of the more spectacular blowups of 2021, but it wasn’t the only one — and many of those companies held onto shares of Grayscale. “A lot of people were using it as collateral throughout 2021 — it was the widowmaker trade. It blew up Three Arrows Capital, BlockFi, Celsius,” said James Seyffart, an ETF analyst at Bloomberg. Another victim: Grayscale’s parent company. DCG’s lending arm, Genesis, went under in the wake of FTX’s collapse. That business was funded in large part by customers of the Winklevoss twins’ exchange, Gemini, who are still waiting to get their funds back. “DCG has a bunch of issues with Genesis in bankruptcy,” Seyffart said. It’s unclear how much DCG itself has been selling, he said, but it recently held as much as $1.4 billion in shares of the bitcoin trust.

You’d think that in crypto, where prices crash and surge as part of the normal course of events, this would all be met with a shrug. Instead, crypto Twitter (the center of crypto universe) is fearing the worst — maybe even expecting Grayscale’s demise. That would be yet another spectacular implosion in the crypto world, on the scale of the failures of FTX and Three Arrows in 2022. As The Wall Street Journal has pointed out, there are actually plenty of good reasons for someone to sell their Grayscale shares now, especially considering that they’re more expensive than those of its competitor funds. Since the SEC approved the ETFs, Grayscale has lost about $500 million a day, almost every day, Seyffart said.

As the price of bitcoin continues to fall, it’s going to make it only easier for Grayscale investors to sell, but it would have to lose the vast majority of its value before it went into an actual death spiral. With so much money going to Grayscale competitors, it’s hard to believe that would happen any time soon — but then again, runs on crypto companies have happened before.