After FTX, The Shoe Drops at Digital Currency Group

By | November 27, 2022
The big grandaddy in crypto is Digital Currency Group. They own a big chunk of Coinbase, Coindesk and have a huge stake in Grayscale Bitcoin Trust ( OTCMKTS-GBTC).

They also own Genesis Capital Corp, a prime brokerage for institutional crypto investors in the US, and that’s a problem.

About 10 days ago, Genesis blocked customers from withdrawals and it’s crypto-lending arm stopped making new loans. At the end of September, it had $3 billion in active loans.

Welcome to the ongoing saga of “Contagion in the World of Crypto,” soon to be an 8-episode Netflix series.

If you have never heard of Coinbase and Grayscale Trust, you must be new here. But I bet for many of you this is the first time you have heard about Genesis Capital.

Rumours started swirling about Genesis, and DCG, just days after the FTX debacle.

On Wednesday, as most American investors were thinking more about turkey than crypto, Barry Silbert, the CEO of DCG, wrote a letter to shareholders that cleared a few things up.

First, the bad news:

Digital Currency Group borrowed $575 million from subsidiary firm Genesis to attempt to prop up the discount to NAV in the Grayscale Bitcoin Trust. DCG started buying Grayscale Bitcoin Trust at $40.

It’s now trading at $9.

In total, DCG spent $772 million since March 2021 buying units of Grayscale Bitcoin Trust.

But that isn’t the only screw-up by DCG in its dealings with Genesis.

Last summer, Genesis lost $1.1 billion on a loan to Three Arrows Capital (which collapsed after the LUNA/Terra Stablecoin debacle).

Finally, Genesis had exposure to the FTX disaster. We don’t know how much exactly, but DCG injected $140 million into Genesis hours before FTX filed for bankruptcy.

Now the Good News

You should have noticed by now that the price of Bitcoin hasn’t gone down on this latest news (it’s actually up 1.5% in the last 5 days).

That’s because it could have been much worse. The worst rumour was that DCG had borrowed deposits from Coinbase, a la FTX. Those rumours have been dispelled with Coinbase showing proof of reserves on Wednesday.

Another doomsday scenario was that DCG could declare bankruptcy which would include Grayscale Trust, and a bankruptcy court could order Grayscale to dissolve, dumping more than 640,000 bitcoin on the open market.

Again, fears about that scenario seem to have receded. DCG still has cash flow to the tune of $300 million a year, on the 2% administration fee it charges to manage Grayscale Trust.

Barry Silbert stated in a letter to shareholders that DCG is on track to do $800 million a year in revenue.

All in all, the letter written by Barry Silbert did a LOT to calm the markets (see the link).
Even if Genesis is forced to declare bankruptcy the $575 million that DCG took out of the company to buy Grayscale shares isn’t due to be paid back until May 2023.

(I’m not a lawyer, so I don’t know if a bankruptcy court could force DCG to pay back the loan early to Genesis creditors. In any case, I’m still waiting for my Mt. Gox payout from 2014, so I’m not holding my breath on that scenario unfolding).

Is This The End of Contagion?

For me, that’s the wrong question to ask. I don’t really care if Mr Silbert and the private shareholders of DCG go bankrupt or not.

I’m more interested in the price of bitcoin and Ethereum.

Since the beginning of November, it’s dropped 20%. In November 2018, it dropped 34%.

Are we at the bottom? I don’t know. But if not, we can see the bottom from here.