On Tuesday, DCG boss Silbert issued a note to shareholders, noting the “difficult industry conditions” plaguing the digital asset sector. Silbert attempted to reassure investors regarding the “lot of noise” circulating about the health of some of the DCG portfolio’s leading lights.
Singled out for special mention in Silbert’s note was Genesis, the New York-based digital asset trading, lending and custodial platform. DCG announced last week that the Genesis Global Capital lending business had made the “difficult decision to temporarily suspend redemptions and new loan originations.”
Silbert blamed the Genesis lending halt on “an issue of liquidity and duration mismatch in the Genesis loan book.” Silbert claimed that the Genesis spot/derivatives trading and custody businesses “continue to operate as usual.”
Genesis had reportedly been seeking “at least” $1 billion in new capital, later reducing this ask to $500 million when no takers/suckers stepped up to the plate. On Monday, Genesis issued a statement that it had “no plans to file bankruptcy imminently” but the very next day the New York Times reported that Genesis had hired “restructuring adviser” Moelis & Company to examine all possible scenarios, including bankruptcy.
On Wednesday, Genesis Global Capital CEO Derar Islim confirmed this hiring, as well as the fact that it had begun talks with “potential investors and our largest creditors and borrowers, including [digital asset exchange] Gemini and DCG.” Last week, the already struggling Gemini warned users of its Earn service that they faced delays in withdrawing their staked assets—worth an estimated $700 million—following Genesis suspending redemptions.
Genesis recently admitted to having around $175 million locked up on the collapsed FTX exchange, after previously declaring that it had “no material net credit exposure” to the debacle. That was followed by an admission that it had suffered “a total loss of ~7M across all counterparties, including Alameda [Research, the FTX-affiliated market-maker].”
Bloomberg recently estimated that Genesis had $2.8 billion in outstanding loans, nearly one-third of which was owed by related parties, including DCG and Genesis Global Trading. In the letter to shareholders, Silbert copped to borrowing $575 million from Genesis to “fund investment opportunities and to repurchase DCG stock from non-employee shareholders.” (How much of this $575 million might have been Gemini users’ loans went unsaid.)
There’s also the previously disclosed $1.1 billion promissory note that DCG issued to cover a Genesis shortfall following this spring’s collapse of the Three Arrows Capital (3AC) crypto hedge fund. Finally, Silbert acknowledged a $350 million loan DCG received from “a small group of lenders led by Eldridge.”
Despite these significant liabilities, Silbert boldly declared that DCG had “weathered previous crypto winters and while this one may feel more severe, collectively we will come through it stronger.” Silbert noted that DCG was on track to generate $800 million in revenue this year, neglecting to add that this was one-fifth below 2021’s revenue.
Silbert helpfully offered to alert shareholders “if we decide to do a financing round,” a scenario that seems almost mandatory by this point. However, since DCG might now have to ask a company it doesn’t own for cash, it will presumably face a similar lack of enthusiasm that greeted the Genesis platform’s begging-bowl appeals.
Gray skies over Grayscale
To many ears, Silbert’s reassurances sounded a lot like those issued by other firms that were ultimately forced into bankruptcy, liquidation and (often) infamy this year. Investors may have been less than reassured by Silbert’s touting of having founded “the first BTC fund, which evolved into Grayscale, now the world’s largest digital currency asset manager.”
Grayscale has been the subject of its own rumors regarding its capacity to carry on. GBTC, the company’s BTC-based trust, trades at a significant discount (around -45%) to the actual price of the BTC tokens it claims to hold. GBTC is currently trading around $9 a share, barely one-fifth of the value it boasted just one year ago during the BTC token’s all-time high.
For years, Grayscale has been lobbying the U.S. Securities and Exchange Commission (SEC) for the right to offer a spot-based BTC exchange traded fund (ETF) that would allow Grayscale to close the gap between GBTC’s price and the BTC token. But the SEC has so far rejected all of Grayscale’s ETF applications and the still-unfolding FTX scandal has likely stalled any progress on this front.
While GBTC investors can sell their shares to other investors following a lockup period, GBTC hasn’t permitted any actual redemptions from the trust for years (since it was known as the Bitcoin Investment Trust). Meanwhile, Grayscale continues to charge users fees of 2% of total assets under management, and with Grayscale believed to provide 2/3 or more of DCG’s annual revenue, don’t expect redemptions to resume anytime soon.
Grayscale alarmed many observers last week when it resisted calls to prove that it actually holds the assets that it claims to hold under its various trusts (Ethereum, Solana, Litecoin and others). Citing “security concerns,” Grayscale said it couldn’t make any “on-chain wallet information and confirmation data publicly available through a cryptographic Proof-of-Reserve.”
Instead, Grayscale explained that the assets underpinning its trusts “are custodied with Coinbase Custody” and reprinted a letter from Coinbase attesting that the assets it was holding on Grayscale’s behalf “are secure.”
DCG’s blockchain daisy chain
We have to take Coinbase (NASDAQ: COIN) at its word regarding its Grayscale obligations, as the GBTC prospectus prohibits its custodians from disclosing the wallet addresses containing GBTC’s roughly 644,000 BTC. Even Grayscale isn’t exempt from this prohibition, meaning there’s an enormous level of “Trust. Don’t verify. In fact, don’t even bother trying to verify, because if we can’t, you can’t.” at play here.
Moreover, Coinbase Custody is an offshoot of Coinbase Global, which is wholly owned by none other than Grayscale’s owner DCG. The ties that bind all the players in this game offer an unsettling echo of the cozy links between FTX—in which DCG also had an investment stake—and Alameda. That infamous pair offered similar assurances regarding the safety and security of customer assets that were eventually exposed as hollow.
Meanwhile, Coinbase shares hit an all-time low this week of just over $40, and while they’ve since rebounded to around $45, that’s well below the $232 at which they started the year and even further from the $330+ they traded in the immediate aftermath of the company’s direct listing on the Nasdaq last year.
Coinbase lost over $2 billion in the first nine months of 2022 as retail investors lost their taste for high-risk digital asset speculation. Given the events of the past couple weeks, this skittishness is likely to worsen in the final quarter.
DCG also has a stake in Circle, which in partnership with Coinbase issues the USDC stablecoin. USDC saw its market cap shrink significantly after Binance, the world’s largest exchange by trading volume, announced in September that it would forcibly convert users’ USDC into Binance’s in-house stablecoin BUSD. So, you know, just good news on all DCG fronts these days.
The dog ate my bathing suit
The incestuous nature of DCG’s portfolio makes one wonder exactly how much real money is underpinning all these companies and how much of it was being used for purposes other than advertised. How many of them are, in Warren Buffett’s infamous analogy, currently swimming naked? We may learn far more than we wanted to know over the coming weeks.
But it’s worth recalling that the original sin at the heart of the digital asset sector’s fatal attraction to fraud was the fateful decision to pass off the neutered BTC protocol as ‘the real Bitcoin.’ Once that fraudulent hurdle was cleared, everything that followed was like taking candy from a baby, be it launching an initial (shit)coin offering, offering double-digit yields for staking said shitcoins or treating customer deposits as operating capital.
Bear in mind that several companies that are either wholly or partly owned by DCG—including Coinbase, Blockstream, Kraken, Bitpay and Protocol Labs—are part of the Crypto Open Patent Alliance (COPA). And COPA was formed for the sole purpose of suing Dr. Craig Wright, advocate for Bitcoin SV (BSV) and chief science officer at blockchain technology firm nChain.
As a utility-focused blockchain, BSV has been spared the pump-and-dump frenzy that has led the sector down this garden path. While other blockchains focused on rampant speculation, BSV was building, including research conducted by Wright and nChain that resulted in the world’s leading blockchain IP portfolio, something COPA members view as a threat to their ability to dominate the blockchain space going forward.
Predatory outfits like DCG realize that the herds of public sheep they are fleecing can never be told that the original vision for Bitcoin was low-cost microtransactions and immutable data storage. Otherwise, there would be little point to the array of function-free tokens these companies are begging you to buy, flip, stake and lend. And that would mean there would be no point for the continued existence of these companies.
Based on its investment portfolio, DCG appears to share genetic traits common to many of the other firms that have crashed and burned over the past year: a strategy of ‘moving fast and breaking things,’ a belief that the rules don’t apply to them, and a sense of entitlement that they should be allowed to do as they like based on the theory that it’s easier to beg forgiveness than to ask for permission.
If nothing else, that familiarity with begging will serve the fraudsters well when deciding who gets the top bunk in their prison cell.
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