2023-1-7 18:00 |
After the FTX collapse, concerns around the Digital Currency Group (DCG) and its subsidiaries (Genesis, Grayscale) began spreading across the industry. Can the crypto market witness yet more contagion?
Most recently, fears have centered around one of the crypto crown jewels, the Digital Currency Group (DCG), a conglomerate of some of the biggest names in the sector, including Genesis, the largest crypto prime broker, asset management firm Grayscale, and news platform CoinDesk.
Here’s a small glimpse of what the failure of one or all the tied firms could mean for crypto.
The Meltdown ExplainedWhile the FTX collapse proved to be crypto’s darkest hour, this could be just the beginning of a potential meltdown for the entire industry. Grayscale, the most significant asset manager in crypto, once holding more than $60 billion in assets, may be at risk and put the whole industry’s future on the line. This development could be directly linked to Genesis Capital losing billions of dollars.
Lately, the crypto industry has been focusing on DCG and how its potential collapse could make Grayscale the next victim. It is one of the most prominent crypto institutions at the center of the FTX fallout, and many are wondering if its collapse will prove to be a death blow to the crypto space.
DCG is one of the most prominent crypto firm and was once valued at $10 billion, with billions in assets under management (AuM), led by Barry Silbert.
DCG rose to prominence as an early crypto adopter. However, in the wake of the collapse of Sam Bankman-Fried’s FTX empire, one of DCG’s subsidiaries, Genesis Global Capital, found itself in a massive hole, posing a threat to the whole Digital Currency Group empire.
Before finding itself in that one-billion-dollar hole, Genesis was practically printing money as the leading crypto lender, providing yield services for almost the entire crypto space. However, things started to take a turn when Genesis lent $2.40 billion to the now infamous hedge fund Three Arrows Capital.
Past RelationsBefore the Terra stablecoin UST de-pegged in May, Genesis traded $1.50 billion of assets (UST and Bitcoin) with the Luna Foundation Guard, or LFG. Then UST collapsed, creating havoc within the market.
If watching $1.50 billion go up in flames wasn’t painful enough, Genesis saw crypto lending stall in the wake of the collapse of lenders like Celsius and uncertainty around Voyager, which also filed for Chapter 11 bankruptcy.
DCG Situation:
– DCG Owes $2.025B
– Genesis can call their $1.675B loan
– Genesis owes $900M to Gemini
DCG Liq
– Grayscale $10B AUM x 2% = $200M x 3x multiple = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M with discount, $1.17B at Par
– VC book = Firesale values in a bear https://t.co/KLmZHX0E2g
But it gets worse. The final blow for Genesis came in the wake of the FTX fallout. Like the Luna collapse, few admitted to having exposure to FTX. On the day of the FTX collapse, Genesis claimed to have “no material net credit exposure.” However, two days later, Genesis backtracked and announced they had $175 million locked in their FTX trading account.
This development gave numerous hiccups for the lending platform ranging from outstanding debts to fears of and, more recently, layoffs. For instance, Genesis paused all withdrawals and active loan obligations amidst the liquidity crunch. According to the company’s official website, overall active obligations amount to $2.80 billion.
For DCG to survive and not suffer significant hiccups, they need to raise more capital to save Genesis. If Genesis can reach a deal, it will have some repairs to do but can potentially keep its doors open. However, from the outside, only a few are hopeful for this outcome.
If creditors reject the deal, Genesis will likely go into bankruptcy with years of court battles ahead. DCG would want Genesis to survive; the problem is what happens if DCG can’t raise the money to save it.
This is where DCG’s other subsidiary, Grayscale, comes into play.
DCG Situation:
– DCG Owes $2.025B
– Genesis can call their $1.675B loan
– Genesis owes $900M to Gemini
DCG Liq
– Grayscale $10B AUM x 2% = $200M x 3x multiple = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M with discount, $1.17B at Par
– VC book = Firesale values in a bear https://t.co/KLmZHX0E2g
To fill the massive hole that Genesis created, many believe that something will need to happen with Grayscale to cover the losses. Grayscale is DCG’s cash cow, operating the most significant institutional investment vehicle for all crypto – the Grayscale Bitcoin Trust (GBTC).
DCG Situation:
– DCG Owes $2.025B
– Genesis can call their $1.675B loan
– Genesis owes $900M to Gemini
DCG Liq
– Grayscale $10B AUM x 2% = $200M x 3x multiple = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M with discount, $1.17B at Par
– VC book = Firesale values in a bear https://t.co/KLmZHX0E2g
GBTC is not like an exchange-traded fund (ETF), so its price cannot accurately track Bitcoin’s price. The main reason is that GBTC shares cannot be redeemed for the underlying Bitcoin. The entire value depends on Grayscale’s credibility to maintain its business.
As Genesis has been taking on increasingly lousy debt hurting the credibility of Grayscale, users gradually speculate on the legitimacy of the GBTC trust. This has led to GBTC shares trading at more than a 45% discount compared to the value of Bitcoin held in the trust.
DCG Situation:
– DCG Owes $2.025B
– Genesis can call their $1.675B loan
– Genesis owes $900M to Gemini
DCG Liq
– Grayscale $10B AUM x 2% = $200M x 3x multiple = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M with discount, $1.17B at Par
– VC book = Firesale values in a bear https://t.co/KLmZHX0E2g
This is a massive decrease in the shares. Nevertheless, consider all the things that could happen to Grayscale.
DCG Situation:
– DCG Owes $2.025B
– Genesis can call their $1.675B loan
– Genesis owes $900M to Gemini
DCG Liq
– Grayscale $10B AUM x 2% = $200M x 3x multiple = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M with discount, $1.17B at Par
– VC book = Firesale values in a bear https://t.co/KLmZHX0E2g
One option for DCG is to sell the GBTC.
GBTC has already taken a beating due to the massive wave of selling. DCG became the largest holder of shares, currently holding millions in GBTC. If the company had to sell all its claims, this would nuke the price of GBTC even further.
This is bad news because many institutions and investors hold the GBTC, and if the price goes down further, this could deteriorate institutional trust to invest in crypto.
Another option for DCG is to sell Grayscale itself. But again, getting rid of the business wouldn’t cover the outstanding liabilities of over $2 billion. This is explained in the screenshot below; consider Grayscale’s two prominent revenue creators: GBTC and its Ethereum equivalent, ETHE.
DCG Situation:
– DCG Owes $2.025B
– Genesis can call their $1.675B loan
– Genesis owes $900M to Gemini
DCG Liq
– Grayscale $10B AUM x 2% = $200M x 3x multiple = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M with discount, $1.17B at Par
– VC book = Firesale values in a bear https://t.co/KLmZHX0E2g
BeInCrypto reached out to Arcane Research to shed more light on the situation. The spokesperson shared a report asking users to maintain caution.
“Investors should pay attention to the ongoing financial distress related to Digital Currency Group (DCG) as the outcome could severely impact crypto markets,” it said.
It also gave a potential “natural, less liquidity-constrained” solution to offset the evolving situation for DCG. Herein recommended a Reg M solution that allows holders of Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust (ETH), and the other trusts to redeem shares at net asset value.
It would allow holders of GBTC and ETHE positions to redeeming them for the underlying assets at a 1:1 ratio.
“A Reg M would cause a massive arbitrage strategy of selling crypto spot versus buying Grayscale Trust shares. If this scenario plays out, crypto markets could face further downside,” Arcane added.
Concluding ThoughtsThe potential collapse of Genesis is more than just about another failed company. It symbolizes an era of lending in the crypto space where shady companies could pump their bags using customer funds. While these shady players could get away with it during the hysteria of the bull market, businesses such as Genesis, BlockFi, Celsius, and others showed they are not built to last, as they have now crumbled only a year after the 2021 bull cycle top.
Whether DCG, Genesis, or Grayscale survives, one thing is sure this situation guarantees the end of the crypto lending era.
The post Digital Currency Group: Is the Fallout From FTX Over, or Is the Worst yet to Come? appeared first on BeInCrypto.
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