What are the massive hidden risks in the market?
In this episode, Guy talks about DCG, Gemini, Genesis, 3AC GBTC trade and more.
Read our notes below to learn more.
DCG
Digital Currency Group is a holding company that owns a number of different companies in the crypto space.
It was founded by Barry Silbert, an ex-banker who’s considered to be one of the OGs of crypto.
The most well-known DCG subsidiaries are CoinDesk news site, Grayscale Bitcoin Trust, Genesis Trading and the Foundry mining pool.
Grayscale
It is a digital currency asset management that was founded in 2013.
The first to launch a Bitcoin trust in 2013.
It was a private placement for institutions and high networth individuals.
Back then, $GBTC shares were the only way that institutions could get Bitcoin exposure through a regulated wrapper.
Genesis Trading
It was one of the first and largest prime brokers in the crypto space.
Its primary business lines include OTC trading, custody of assets, lending and borrowing.
It had a number of institutional clients that it had trading and lending relationships with.
One of the most well-known of these is 3AC or 3 arrows capital that collapsed in June last year.
It also offered services to retail-facing exchanges like Gemini.
Gemini Earn
Gemini entered into an agreement with Genesis to run a lending program which is Gemini earn.
Gemini Earn lets users earn an income by lending their crypto to Genesis.
It grew considerably since it was launched and by November of last year, there were over 340,000 customers with $900M locked up.
The users learned in November of last year that they will not be able to withdraw their assets because of the fact that Genesis was functionally insolvent and had taken a final blow from the collapse of FTX.
Cameron Winklevoss put up an open letter to DCG which detailed fraud accusations and demanded Barry Silbert to step down as DCG’s CEO.
The 3AC GBTC Trade
3AC were big borrowers of Genesis and they had about $2.3B worth of loans that were under-collateralized.
3AC blew up and the founders ghosted their lenders only to show up on crypto Twitter months later to say they were launching a lifestyle podcast and raising for a new fund.
The price of GBTC shares traded at a premium to the net asset value of the Bitcoin in the trust.
GBTC shares weren’t easily converted back to $BTC as it could only be done at designated unlock intervals.
One of the theories out there is 3AC engaged with Genesis in a recursive lending scheme that would help inflate the value of GBTC, increase the fees of Grayscale and increase the profits of 3AC.
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3AC would post some collateral to Genesis to borrow $BTC then it was sent back to Genesis to issue GBTC shares at Grayscale then they were traded at a premium of the net asset value of the $BTC that was locked up there then they would use these shares as collateral and post them back to Genesis which enabled them to borrow more $BTC.
Barry Silbert tweeted about daisy chain borrowers back in June 2021.
These trades that were accounted for by Genesis were misleading because they were seen as collateralized loans wherein they were actually swap transactions of $BTC for the GBTC shares.
This generated a number of problems for both 3AC and Genesis because the value of the collateral that had been posted to run this trade was now trading at below the value of the loans themselves.
Genesis was stuck in a position where it would only be participating in the losses from the deterioration of the trade.
According to Cameron, not only did Genesis not close out 3AC’s position when the NAV trade inverted, it continued to lend to 3AC on attractive terms and accept GBTC as collateral.
Barry was comfortable with Genesis loading up more and more on this toxic trade because it was a gambit to feed the Grayscale Trust - Barry’s financial hotel california that would print money for the DCG universe in perpetuity.
After the collateral was liquidated, Genesis was left with a shortfall of about $1.2B.
Questionable Accounting
Genesis former CEO Michael Moro claimed that DCG had assumed certain liabilities of Genesis which was stated in his tweet thread back in July 2022.
DCG issued a $1.1B promissory note to Genesis that had a term of 10 years and came with an interest rate of 1%.
There is no way that a 10-year unsecured promissory note will come with an interest rate that is 3 times less than the cost of borrowing of the U.S. government.
When FTX collapsed last year, it led to a suspension of withdrawals from Gemini Earn and that led to concerns about the state of Genesis and the broader DCG.
DCG’s response
This January, not only was it disclosed that the Department of Justice was looking into DCG but also the SEC was taking action against Gemini and Genesis.
Barry Silbert also came out with a long-form shareholders letter that attempted to address some of the accusations and questions that had been leveled.
Barry denied that there was any commingling of funds in DCG and maintains that the Grayscale business units are completely separate and operate as any independent businesses would.
DCG had a lending and trading relationship with Alameda but nothing more than that.
The promissory note was apparently structured on the advice of financial and legal professionals.
DCG effectively assumed Genesis’s risk of loss on the 3AC loan with no obligation to do so.
Implications for the future
DCG is now trying to raise capital whatever means necessary.
There have been reports that they’re weighing up offloading their broader venture portfolio of close to $3B which will be bad news for the projects that have taken an investment from DCG.
The worst kind of seller is a forced seller.
Grayscale has been holding out in the hope that SEC would allow them to convert the trust into an ETF and help to alleviate the massive discount given the easy convertibility.
Justin Sun announced that he is willing to spend up to $1B of his own money to buy some of DCG’s assets.
Valkyrie Investments made a proposal to take over Grayscale as the new sponsor and manager.
If the Grayscale trust was to be unwound in order to redeem the dollar amounts for investors in GBTC shares, that would mean that all the $BTC that’s inside of it would have to be sold on the open market.
This will be a long drawn out process and Barry is well-skilled in the art of restructuring given his TradFi background.
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TODAY’S EDITION IS BROUGHT TO YOU BY LEDGER HARDWARE WALLET
We are all having trust issues with centralised exchanges so we have partnered with the Ledger, who is the industry leader and most trusted vendor in the hardware wallet space.
Using a hardware wallet is the smartest way to secure your assets.
Act now, click the link below and secure your crypto.