Key Takeaways
- DCG own the Grayscale Bitcoin Trust, which has been trading at a sizeable discount following concern around the reserves held
- DCG has begun selling off crypto assets at distressed prices following bankruptcy of Genesis
- Market seems to have priced this in, but there could be more twists to come
A couple of weeks ago, I wrote a piece assessing what the bankruptcy filing of crypto platform Genesis meant for crypto.
The reverberations are ongoing. Today, the Financial Times reported that Genesis’ parent company, Digital Currency Croup (DCG), has begun selling off its crypto holdings at distressed prices.
The issue with crypto, of course, is that the web can be tangled and incestuous, triggering everybody’s least favourite word: contagion. We saw this in the aftermath of the LUNA crash in May 2022, when firms across the space imploded as they all had different pieces of each other. The same movie played again when FTX went under, ultimately what toppled Genesis and caused the trouble at DCG.
DCG owns Grayscale Bitcoin Trust
With regard to DCG, the main fear in the market was its connection to the biggest Bitcoin fund in the world, the Grayscale Bitcoin Trust. DCG is the parent company of the fund. This connection led to the market wondering aloud whether the GBTC had all the reserves (Bitcoin) backing its assets.
Despite calls for proof of reserves, Grayscale declined to provide assurance.
6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.
— Grayscale (@Grayscale) November 18, 2022
This concern, amongst other reasons such as difficulty in redeeming shares and fees payable, has led to a large discount compared to the net asset value of the fund for much of the last couple of years.
DCG selling off assets
Now, DCG is selling shares in several of its holdings, as it scrambles to raise capital to pay back creditors of Genesis. DCG, which is backed by SoftBank, is still headed by Barry Silbert, despite calls that he should resign.
Silbert, born and raised in Maryland, USA, had his wealth listed at $3.2 billion in April 2022 following a series of highly successful projects in the digital asset space. It is safe to assume that figure is a little smaller now.
Silbert had previously worked in investment banking, and even has prior experience with crypto’s new favourite pastime: bankruptcies. He has worked on some of the biggest bankruptcies of recent times, including Enron and WorldCom.
“The experience working on complex, problematic restructurings proved invaluable,” he told the U.S. Senate Banking Committee in 2011.
Gemini, the crypto platform founded by the Winklevoss twins, claim to be owed $900 million by Genesis. Cameron Winklevoss has thrown some hefty allegations Silbert’s way, including the f-word: fraud. Silbert has denied the allegations.
https://twitter.com/cameron/status/1612806661508567042
Crypto market going forward
The bankruptcy highlights the undercurrents of concern in the crypto industry despite a recent pump in the crypto markets.
It is clear that it is macro, and the softening expectations going forward around how long high interest rates will persist (at least compared to what was previously anticipated) is what is driving prices right now.
There is a reasonable argument to make that DCG selling out of assets could ultimately benefit the industry long-term, at least with regard to the Grayscale Bitcoin Trust. Then again, the continued contagion still presents as a very real risk, despite what prices may think.
The market may think the bad news has all been priced in. I hope that is true. But in crypto, we have learned that things are never what they seem. An industry cloaked in a veil of secrecy; tweets from CEOs meant to assure instead of audits; the allure of a transparent blockchain often never enough.
I’m not necessarily predicting there is more coming down the road. But with prices soaring, it feels like the market has assumed this has all been priced in and the worst is over. The point is that I – nay, we – don’t really know. But the market is acting like it does.