Crypto investor DCG reveals a network of investments between units

Cryptocurrency group Digital Currency Group has used money it borrowed from a struggling Genesis unit to invest in the products of another subsidiary, highlighting the delicate links across billionaire Barry Silbert’s empire.

Silbert wrote to shareholders on Tuesday explaining that DCG has borrowed $575 million from its brokerage Genesis, which is now seeking funds to avoid collapsing in an accelerating crisis across the industry.

DCG told the Financial Times that it used some of that money to purchase an investment product issued by Grayscale, another of its businesses, which operates a US-listed fund that tracks the price of bitcoin.

DCG lacks the public profile of exchanges like FTX or Binance, but it is one of the largest and early investors in the cryptocurrency industry still reeling from the collapse of Sam Bankman-Fried’s FTX this month. This latest disclosure highlights links across the Silbert Group, which was valued at $10 billion last year by investors including SoftBank, Singapore sovereign wealth fund GIC and Google’s investment arm CapitalG.

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

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

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

DCG later told the FT that a “portion” of the borrowing from Genesis was used to fund the GBTC purchase, and $300 million was spent on share buybacks.

Since then, the prices of Grayscale trust units that DCG has purchased have fallen sharply. The weighted average price of purchases since March 2021 was $40, according to a Financial Times analysis, but units closed at $9.23 on Wednesday. DCG said it had other offsetting positions that made its GBTC purchase “market neutral.”

Until October of this year, traders who wanted to deposit bitcoins into a Grayscale fund in exchange for easy-to-trad GBTC units had to use Genesis as an exclusive issuance agent. The Grayscale Trust pays an annual fee of 2 percent of its assets under management to DCG-owned Grayscale.

Investing in GBTC previously made easy profits for traders because until early 2021 it traded at a premium to the price of the underlying Bitcoin asset. The premium was there due to the demand for bitcoin wrapped in a traditional financial structure.

GBTC is now trading at a steep 39 percent discount to the Bitcoin price. The SEC has repeatedly refused to allow the Grayscale Fund to convert to an exchange-traded fund structure open to retail investors.

The popularity of GBTC when it trades at a premium, and the ease with which units can be traded, means that it has been widely used as collateral in cryptocurrency lending, including by Genesis itself.

Silbert Holdings Inc. has injected cash into Genesis after a series of high-profile shocks to the industry this year. One came after Genesis lost $1.1 billion on a loan to collapsed hedge fund Three Arrows Capital, which pledged GBTC as collateral for the loan. Silbert said Tuesday that DCG assumed Genesis liabilities in the process, and subsequently owes $1.1 billion to Genesis.

Recently, DCG poured $140 million into Genesis hours before FTX filed for bankruptcy. Since then, Genesis has raced to raise additional new funding and told clients on Wednesday that it is working with DCG and exchange Gemini to shore up liquidity.

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