Grayscale - DCG, A Looming Collapse Of Monumental Proportions

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Written by

Pantera

Bitcoin Is Cash

1 year ago

Topics: Cryptocurrency, Cryptocurrency news, Grayscale, DCG, Collapse, ...

DCG Facing An Existential Threat As Genesis Collapse Is Imminent

The Digital Currency Group is a behemoth conglomerate operating on top of the cryptocurrency industry.

The collapse of the FTX exchange and connected entities leads to questions regarding the viability of every private company operating inside the cryptocurrency field.

The Digital Currency Group (or DCG), a crypto behemoth, is financially associated with multiple other entities of the crypto field, with ties, control, or financial exposure to hundreds of crypto exchanges, businesses, and websites.

DCG is in control of some of the most influential crypto companies, with some facing today an existential threat that could also affect the group in a devastating direction.

Grayscale, Genesis, Foundry, Luno, Coindesk, and Tradeblock compose the main subsidies of Barry Silbert’s DCG, although the company maintains shares and control of hundreds more crypto-related entities.

The landscape of the crypto industry seems more hostile than ever.

While DCG is one of the main reasons the crypto market emerged and reached $2 trillion in valuation in 2021, it could also become the reason for the rapid descent into obscurity.

A collapse of Grayscale will end the crypto market as we know it.

Genesis With $1 Billion Gap About To Declare Bankruptcy

What Every Business Said Before Going Bankrupt

Genesis (a DCG subsidy) seeks (for almost one month) $1 Billion from investors to cover the recent losses from the collapsed funds and exchanges. Time is running out, and DCG apparently can’t fill this gap.

The crypto broker for institutions and accredited investors appears to be the next fund heading toward bankruptcy.

Grayscale (and DCG’s) problems start with Don Kwon’s Terra Luna:

Terra Luna

Terra Luna was the first big name in crypto to go down, with its algorithmic stablecoin UST losing the 1:1 peg to the dollar and dragging the whole Terra Luna ecosystem to the ground, wiping out a combined $45 billion market cap. Estimates suggest Luna’s collapse caused $300 billion in losses in the crypto market.

Three Arrows Capital

Kyle Davies and Su Zhu’s fund declared bankruptcy after losing $3 Billion in 2021 and 2022, right after Luna’s collapse. It appears the fund was already unstable before the UST — Luna incident.

Three Arrows Capital was also a top investor in GBTC, holding 5% of the trust shares at one point.

Genesis ( DCG subsidy)

The collapse of Three Arrows Capital affected DCG’s subsidy, Genesis.

Genesis offers digital asset financial services (trading) to institutions, wealthy investors, and crypto businesses.

The DCG subsidy is currently in bankruptcy talks as it has lost $1 Billion to now bankrupt Three Arrow Capital and another $200 million to FTX.

BlockFi

BlockFi stopped accepting GBTC shares as collateral in July 2022 (source), right after the collapse of VC fund Three Arrows Capital. BlockFi also declared bankruptcy in November 2022.

FTX

$175 million of Genesis funds were held at FTX before the exchange filed for bankruptcy.

Genesis is facing immediate bankruptcy.

We hear about $1 billion missing from Genesis, but we don’t know the exact gap, or if other DCG subsidies face similar insolvency issues.

According to CNBC, in a leaked DCG document to investors, Barry Silbert announced that debt obligations reached $2 Billion.

As it always happens in similar cases, the number only goes up.

Grayscale’s GBTC Discount To NAV At Historic Low (50%)

(Source: YCharts)

Grayscale started the GBTC Trust in 2013, and until 2021 it was considered the only regulated fund that provided exposure in cryptocurrency to institutions and accredited investors.

However, since February 2021, GBTC is trading at a discount (50% lower than spot markets) on OTCQX (a top-tier over-the-counter (OTC) regulated market).

Bitcoin (BTC) held by Grayscale (Source: Coinglass)

Grayscale charges a 2% fee yearly, and it has sold 23,000 BTC in the last two years to cover expenses and acquire profit.

The GBTC trust currently holds 632,000 BTC.

Grayscale stopped accepting new investors for its Bitcoin Trust (GBTC) at the beginning of 2021 when the Trust price at the secondary OTC market started trading lower than the spot price in cryptocurrency exchanges.

The gap keeps increasing for two years, with GBTC touching a 50% discount (December 2022).

Almost All Grayscale Trusts Are Trading In Discount

Besides GBTC, Grayscale offers more top cryptocurrencies in the form of trusts like Ethereum, Litecoin, and Bitcoin Cash. It also presents a variety of lower-tier tokens and cryptocurrencies (such as Decentraland, Chainlink, Solana, and BAT).

It also appears that most of the trusts Grayscale offers were trading at huge premiums for years (700%–1000% from the spot price). Although, these premiums turned to discounts of 40–50% in almost all Grayscale trusts.

These extraordinary premiums were attracting speculative arbitrage traders, however, they also included significant dangers. The Grayscale trusts maintained a vesting period of 12 months (in 2021, the vesting period changed to 6 months for GBTC and ETHE).

Only two of Grayscale’s new trusts trade at a premium currently (Filecoin and Chainlink). However, these two trusts also come with a 12-month vesting period, so we should expect these premiums to evaporate within a few months.

The Possible Dissolution of Grayscale

(Source: Grayscale0

If DCG survives, a possible outcome is the dissolution of Grayscale as there is no interest in the OTC market for these trust shares.
Other products like futures-ETFs, and spot ETFs in Canada and other jurisdictions cover US investors (institutions and businesses in a regulated custodian approach).

Grayscale apparently will never get SEC’s approval to transform the GBTC and other trusts into spot ETFs.

In June 2022, Grayscaled filed a lawsuit against the SEC over its decision to accept futures ETFs but not Grayscales (and other funds) spot ETFs for GBTC. It appears the SEC verified its firm stance on December 12th, 2022, citing oversight concerns quoting NYSE:

“fraud and manipulation may exist and that bitcoin trading on any given exchange may be no more uniquely resistant to fraud and manipulation than other commodity markets.”

Meanwhile, Grayscale suspended redemptions of GBTC in 2016 after the trust violated an SEC rule.

All Grayscale trusts trade at a vast discount (40%-50%), so perhaps the best move is to dissolve Grayscale entirely and distribute the cryptocurrencies to the hands of the investors.

Without transforming into ETFs, Grayscale Trusts will serve no purpose.

Genesis Liquidation Can Force DCG Bankruptcy

However, with DCGs troubles and Genesis in bankruptcy row, perhaps Grayscale has more issues than turning the trust into an ETF.

With $15 Billion in cryptocurrencies at Grayscale’s treasury, Genesis will force the rest of the DCG group into bankruptcy.

DCG is not bailing out its subsidy for its reasons. Because it already injected liquidity, but the gap increased after FTX (so DCG feels there’s no more legal pressure to save its failing subsidy), or because it has no money left.

If Genesis fails, the liquidators will seize Grayscale’s reserves like Bitcoin and other cryptocurrencies. And this could be the final moment for DCG.

Samuel Bankman Fried was telling how FTX US and other FTX-related businesses were unaffected by the exchange collapse, yet we know the outcome. There is nothing spared in similar situations. If Genesis fails, DCG is likely to fail as well.

Grayscale holds all the trust cryptocurrencies at Coinbase, thus law enforcement can seize them with ease.

In Conclusion

(Source: Twitter)

The situation with DCG is even worse than many suggest.

Anyone questioning DCG faces upsetting attitudes. Yet, a couple of days later, the group announced a $2 Billion gap.

In case Genesis collapses, the bankruptcy of DCG seems inevitable, and a liquidation procedure will follow, including Grayscale’s reserves.

DCG presents the firm grip of the old system to the new one.

The DCG group never promoted the use of crypto as an alternative to fiat currency. P2P adoption was not part of the agenda of the group.

With Grayscale, Barry Silbert presented an alternative vehicle for investing in cryptocurrencies, attached to legacy finance and defeating the purpose.

Grayscale and DCG never promoted the disruptive potential of cryptocurrency but encouraged the speculative aspect of wild trading and hype instead.

Cover Picture on Pixabay

References:

DCG’s Barry Silbert reveals crypto firm has $2 billion in debt, CNBC
Genesis liquidation could force DCG bankruptcy
BITCOIN INVESTMENT TRUST, SEC Filing
Grayscale Bitcoin Trust (BTC), OTCMarkets
What Really Happened To LUNA Crypto, Forbes
Crypto lender Genesis tells clients it is working to preserve their assets
Grayscale Investments Holdings, Coinglass
GBTC Discount or Premium to NAV, YCharts
GBTC’s Discount Deepens to Near 50%, TrustNodes

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