GRUB error: sparse file not allowed

Yes ─ I’m sorry but I only just remembered that you may need to include zstd support when reinstalling GRUB for a btrfs-based system.

sudo grub-install --recheck --no-rs-codes --modules="btrfs zstd part_gpt part_msdos"
sudo update-grub

Also make sure that you add the btrfs and zstd module support in /etc/default/grub, for future reference.