Crypto investor DCG uncovers a web of cross-unit investments

Crypto conglomerate Digital Currency Group used funds borrowed from its struggling Genesis unit to invest in another subsidiary’s products, highlighting the delicate ties between billionaire Barry Silbert’s empire.

Silbert wrote to shareholders on Tuesday explaining that DCG had borrowed $575 million from its broker, Genesis, which is now seeking funds to stave off a collapse amid an accelerating crisis in the industry.

DCG told the Financial Times that it used some of those funds to buy an investment product issued by another of its businesses, Grayscale, a US-listed trust that tracks the price of bitcoin.

DCG lacks the public profile of exchanges like FTX or Binance, but is one of the biggest and earliest investors in the crypto industry, which is still behind the collapse of Sam Bankman-Fried’s FTX this month. This latest revelation highlights the links between the Silbert group, which was valued at $10 billion last year by investors such as SoftBank, Singapore’s sovereign wealth fund GIC and Google’s venture capital arm CapitalG.

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New York-based Genesis Trading halted withdrawals from its lending unit last week, citing “unprecedented market turmoil,” and has been looking to raise cash ever since. It said this week it was not in danger of an “imminent” bankruptcy, but since then Moelis has hired investment bankers to help it explore “all possible options.”

Since March 2021, DCG has spent $772 million in open market purchases of Grayscale Bitcoin Trust (GBTC), according to US securities filings. Some of DCG’s purchases were funded with US dollars and bitcoin, which the group borrowed from Genesis Trading, DCG told the FT.

Silbert told investors that DCG borrowed $575 million from Genesis on a “characteristic basis” to fund undisclosed “investment opportunities” and buy back DCG shares from non-employee shareholders.

DCG subsequently told the FT that part of the loan from Genesis was used to finance the GBTC purchases and that $300 million was spent on share buybacks.

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The price of the grayscale asset management units purchased by DCG has since decreased significantly. According to the FT’s analysis, the weighted average price of purchases since March 2021 was $40, but on Wednesday the units closed at $9.23. DCG said it had other offsetting positions that made its GBTC purchases “market neutral”.

Until October of this year, traders who wanted to deposit bitcoins in the grayscale trust in exchange for more easily tradable GBTC units had to use Genesis as the sole issuer. The Grayscale trust pays an annual fee of 2 percent of its assets under management to DCG-owned Grayscale.

Investing in GBTC used to bring easy profits to traders as it traded at a premium to the price of the underlying bitcoin asset until early 2021. The premium existed because of the demand for bitcoin wrapped in the traditional financial structure.

GBTC is now trading at a steep 39 percent discount to the price of bitcoin. The US Securities and Exchange Commission has repeatedly refused to allow the gray trust to convert into an exchange-traded fund open to retail investors.

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GBTC’s popularity when it traded at a premium and the ease of trading with units meant it was widely used as collateral in cryptolending, including by Genesis itself.

Silbert’s holding company pumped cash into Genesis after the industry has been hit by a number of high-profile shakeups this year. One came after Genesis lost $1.1 billion on a loan to collapsed hedge fund Three Arrows Capital, which secured GBTC as collateral for the loan. DCG assumed Genesis’ liabilities in the process and then owed Genesis $1.1 billion, Silbert said Tuesday.

Recently, DCG injected $140 million into Genesis, hours before FTX filed for bankruptcy. Genesis has been racing to raise additional funding since then and told clients on Wednesday that it would work with DCG and the Gemini exchange to boost liquidity.

Source: https://www.ft.com/content/6b0e81ad-effd-4e1c-ad9c-0b9f708dcdf5