Grayscale Bitcoin Trust: Research Firm Wraps Up Proof Of Reserves But There Is A Catch

While there are still no details on a possible rescue of Genesis Trading, there is at least apparently some positive news regarding Grayscale Bitcoin Trust (GBTC).

Ryan Selkis, co-founder of Messari stated on Tuesday that it appears Genesis has “days, not weeks” to reach an agreement with creditors to avoid Chapter 11. A building site for the crypto community, the question of whether Grayscale really owns Bitcoin at a 1:1 ratio has now been investigated by analytics firm OXT Research.

For its part, Grayscale, which is the largest legal holder of Bitcoin with around 633,000 BTC, refused to provide a proof of reserve in recent days. Grayscale said in a statement via Twitter that it cannot make a cryptographic proof of reserve from Coinbase Custody publicly available due to security concerns.

“We know the preceding point in particular will be a disappointment to some, but panic sparked by others is not a good enough reason to circumvent complex security arrangements that have kept our investors’ assets safe for years,” Grayscale said.

Shortly thereafter, Coinbase Custody also published a letter to Grayscale investors. The company reassured investors and confirmed that funds were being held in cold storage. However, due to strict regulation, Coinbase Custody is prohibited by law from lending customer funds, the company said.

OXT Research Provides Proof Of Reserves For Grayscale

To begin a community-led effort to provide transparency for GBTC holdings, OXT Research has taken steps in recent days to identify likely GBTC addresses and balances based on public information and blockchain forensics.

On Sunday, they published part one of their analysis, in which they used public data and chain forensics to identify 432 addresses with 317,705 BTC as likely GBTC custody activity. However, this represented only about 50% of the current holdings reported by GBTC.

“Additional work is necessary to ID the remaining addresses. […] But it will be time consuming to ID the remaining ~315k BTC,” OXT Research said.

In part two of its analysis, published a few hours ago, the research firm used additional on-chain forensics to confirm the approximate balance of 633,000 BTC held at Coinbase Custody.

The starting point of part one of the analysis was the transfer of 240,000 BTC from the then GBTC custodian XAPO to Coinbase Custody after July 2019, but this approach was exhausted. That’s why OXT Research expanded to Grayscale and Coinbase Custody’s interactions with known counterparties in part two of its investigation.

As a result, the firm concludes that Grayscale’s self-reporting is credible:

Obviously no heuristic or set of heuristics are perfect, and this analysis certainly includes false positives and negatives. But our result is almost identical to the G(BTC) self-reported holdings.

Part 2 Estimate: 634,639 BTC
G(BTC) Reported: 633,394 BTC

However, there is also a (small) catch. Despite holding as much BTC as they claim to hold, Grayscale has chosen to forgo transparency. “Why?”

Originally, the research firm assumed that “Coinbase Custody has some sort of non-disclosure agreement.” However, this contradicts an official letter.

We had originally thought that Coinbase Custody had some type of non-disclosure policy.

But read the two underlined sentences from this letter.

It seems clear that Coinbase Custody is willing to disclose addresses.

— ∴Ergo∴ (@ErgoBTC) November 23, 2022

OXT Research therefore concludes that one of the only real reasons Grayscale might not want to disclose their addresses is that they want to avoid providing information about who their most used counterparties are.

This could be DCG and Genesis Trading, according to OXT Research. The analysis shows that Grayscale has two preferred wallet clusters as counterparties. Both of these clusters have “OTC” wallet profiles with low transaction and address counts, high BTC volumes, and a preference for activity during EST working hours:

They are also intimately linked, with 1057 direct transactions and 336k BTC in direct flows between the two clusters. A massive relationship, indicating that these may be the same entity.

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