Crypto conglomerate Digital Currency Group has used funds borrowed from its struggling Genesis unit to invest in the products of another subsidiary, underscoring 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 collapse in an accelerating crisis in the industry.
DCG told the Financial Times that it used some of those funds to purchase an investment product issued by Grayscale, another of its businesses, which operates a US-listed trust that tracks the price of bitcoin.
DCG lacks the public profile of exchanges such as FTX or Binance, but is one of the largest and earliest investors in a crypto industry still reeling from this month’s collapse of FTX’s Sam Bankman-Fried. This latest revelation highlights ties within Silbert’s group, which was valued at $10 billion last year by investors including SoftBank, Singapore sovereign wealth fund GIC and Google’s venture capital arm CapitalG .
New York-based Genesis Trading halted withdrawals from its lending unit last week, citing “unprecedented market turbulence” and has been seeking to raise funds ever since. He said this week he was not at risk of “imminent” bankruptcy but has since hired Moelis investment bankers to help him 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 by US dollars and bitcoins that the group borrowed from Genesis Trading, DCG told the FT.
Silbert told investors that DCG had borrowed $575 million from Genesis “at arm’s length” to fund undisclosed “investment opportunities” and repurchase DCG stock from non-employee shareholders.
DCG later told the FT that “part” of the loan from Genesis was used to fund the GBTC purchases, and $300m was spent on share buybacks.
The Grayscale trust units that DCG purchased have since fallen sharply in price. The weighted average price of purchases since March 2021 was $40, according to an analysis by the FT, but units closed at $9.23 on Wednesday. DCG said it had other offsetting positions that made its purchases of GBTC “market neutral”.
Until October this year, merchants who wanted to deposit bitcoin into the Grayscale trust in exchange for the more easily tradable GBTC units had to use Genesis as their exclusive issuing agent. The Grayscale Trust pays an annual fee of 2% of its assets under management to Grayscale, owned by DCG.
Investing in GBTC had previously yielded easy profits for traders as until early 2021 it was trading at a premium to the price of the underlying bitcoin asset. The premium existed due to the demand for bitcoins wrapped in a traditional financial structure.
GBTC is now trading at a steep 39% discount to the price of bitcoin. The United States Securities and Exchange Commission has repeatedly refused to authorize the conversion of the Grayscale trust into an exchange-traded fund structure open to retail investors.
GBTC’s popularity when trading at a premium and the ease of trading units meant that it was widely used as collateral in crypto lending, including by Genesis itself.
Silbert’s holding company pumped 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. DCG assumed Genesis liabilities in the process, subsequently owing Genesis $1.1 billion, Silbert said Tuesday.
Most recently, DCG injected $140 million into Genesis hours before FTX filed for bankruptcy. Genesis has since scrambled to raise additional new funding and told clients on Wednesday that it was working with DCG and trading Gemini to bolster liquidity.
#Crypto #Investor #DCG #Reveals #Network #Investments #Units