DCG, Genesis, Grayscale, and GBTC are getting more and more difficult...
Written by: Huo Huo
Recently, "DCG is deep in debt crisis, Gemini Lianchuang sent an open letter to DCG demanding repayment of 900 million US dollars in arrears" occupying major headlines, DCG came to the forefront, first the negative premium of its Grayscale Bitcoin Trust product (GBTC) continued to expand to 50 % set a new record low, and was later exposed to owe subsidiary Genesis more than 1.1 billion U.S. dollars, and asked the latter not to disclose.
Genesis, DCG, Grayscale, and GBTC all became the focus for a while, and the industry panicked. Is this a crisis hidden in the seemingly calm encrypted digital currency market? The industry's first "black swan" in 2023? Or a false alarm?
01 Giant Whale DCG, Grayscale, Genesis, Gemini
First, let's clarify the relationship between these institutions:
Grayscale (Grayscale), Genesis, are all subsidiaries of Digital Currency Group (DCG). Grayscale issues credit products such as GBTC, and Genesis is responsible for selling these products (trading, lending, and hedging).
In addition, Gemini (Gemini Trading Platform) is an encrypted trading platform, which has provided a wealth management deposit product (Gemini earn) with a return of up to 8% to absorb user funds, and then provide the funds to the partner Genesis for operation to achieve high Amount of annual interest rate return.
In order to obtain high returns in the cryptocurrency market, the parent company DCG participated in the Bitcoin trust fund GBTC issued by Grayscale. Its business model is: DCG subscribes GBTC and then issues it to the market, charging a 2% management fee.
Now to clarify this, it is basically easier to understand why luna’s thunderstorm brought a major negative impact on the market, and then three arrows exploded, which indirectly caused DCG to lose 900 million yuan.
Take Sanjian Capital as an example. In July 2022, Sanjian Capital exploded. Sanjian Capital, as the largest holder of GBTC, caused the price of GBTC to shrink sharply due to the decline in the market. The negative premium rate continued to expand. In the face of huge losses, Sanjian Capital only Can sell GBTC in the secondary market (because the mechanism cannot be redeemed) to call for margin. At the same time, because of too much leverage, Three Arrow Capital borrowed money from multiple lending platforms (including Genesis), as well as the unanchoring of stETH and the collapse of LUNA And other factors, eventually led to its bankruptcy.
After bankruptcy, its debt owed as high as 3.5 billion US dollars, and Genesis was once the largest creditor of Sanjian Capital, with a lot of GBTC collateral. Sanjian was liquidated after bankruptcy but lost money. Suffering a loss of US$1.2 billion, the parent company DCG provided US$900 million in rescue funds at the time, allowing it to escape.
Subsidiary Genesis suffered a loss due to FTX's huge investment. This was an event that was not relevant to DCG or even its subsidiary Grayscale, but why was it affected?
This stems from the fact that DCG, as the parent company, has borrowed billions of dollars in debt from Genesis. Once Genesis faces bankruptcy and liquidation, DCG, as a debtor, will need to fulfill its debt repayment responsibilities. As an asset management company, DCG has most of its funds. It belongs to the user's assets, and many of their own funds are still locked in Grayscale's bonds. Therefore, if DCG is faced with the settlement of large debts, it will need to use Grayscale's locked-up Grayscale. The possibility of realization, thus triggering the FUD sentiment in the encrypted financial market.
It just so happens that encrypted trust products such as GBTC are issued by the subsidiary company Grayscale (Grayscale) . Due to the form of its bonds, a large number of encrypted assets held by it have not been directly realized, but are unlocked in the form of ultra-long periods ( Unless there are special circumstances and special treatment), when the parent company may face bankruptcy, Grayscale will also face the liquidation of its assets.
In November 2022, FTX went bankrupt, and Genesis, as one of FTX's investment institutions, made things worse again .
On November 10, 2022, Genesis announced that it could not withdraw funds worth approximately US$175 million in its FTX trading account, and FTX Thunder, the largest encrypted asset trading platform at that time, declared bankruptcy;
On November 16, 2022, Genesis once again announced the suspension of withdrawals for this reason, and also stopped the issuance of new loans;
On December 8, 2022, Genesis issued an email to customers stating that it will take more time to resolve Liquidity issues.
So in fact, the DCG problem did not happen overnight, and the potential crisis this time is also the comprehensive impact of a series of thunderstorms in the market.
It’s just that the direct fuse is that the FTX thunderstorm caused Genesis to be short of funds and unable to withdraw cash, which implicated Gemini’s fund shortage and was also unable to withdraw cash, which led to the magnification of the matter, leading to DCG being exposed to borrowing $1.675 billion from Genesis , or facing the possibility of bankruptcy and liquidation.
Once Genesis went into liquidation, the chain of events would continue. Then DCG, the parent company of the borrower, will need to pay off its debts. If the locked funds in the Grayscale trust fund are used (assuming that DCG cannot raise enough funds from the outside), then Grayscale will be affected. Therefore, there is a serious FUD sentiment, worrying that the Grayscale fund will be implicated and lead to the sale of encrypted bonds such as GBTC, and then the encrypted financial market will usher in another wave of plummeting.
02 Crisis approaching?
Genesis is the lead partner behind cryptocurrency trading platform Gemini’s lending product Gemini Earn , a high-yield savings product that offers clients up to 8% annual returns on crypto deposits, depending on tokens held.
As mentioned above, in November 2022, Genesis announced that nearly $175 million in its Derivatives business was trapped on the FTX platform, so withdrawals and new loans will be suspended. After Genesis suspended withdrawals, Gemini also suspended withdrawals for Gemini Earn users.
So far, it has aroused users' anger and doubts, or they will take legal channels to protect their own rights and interests. The pressure is all on Cameron Winklevoss, the founder of the Gemini encryption trading platform, and Gemini is also desperate.
So there was the news of "Gemini Lianchuang's Open Letter to DCG: Demanding Repayment of $900 Million in Arrears".
On January 2 , Gemini co-founder Cameron Winklevoss, on behalf of more than 340,000 users of its Gemini Earn product, sent an open letter to DCG founder Barry Silbert, accusing him of adopting "malicious delaying tactics," saying that DCG and its subsidiary Genesis Owing $900 million to Gemini customers, and DCG's internal fund management is "a mess", borrowing about $1.675 billion from Genesis for other businesses within the group. The letter stated that Gemini has been waiting for a negotiated solution for up to 6 weeks, but the other party deliberately delayed the process and has not yet given any response, and asked DCG to publicly commit to jointly resolve this issue before January 8, 2023.
A few hours later, DCG founder Barry Silbert responded to the open letter by saying that he did not borrow $1.675 billion from Genesis, never defaulted on the interest of Genesis, and is still repaying all outstanding loans. The next loan maturity date is May 2023.
On January 3, Cameron Winklevoss, co-founder of Gemini, responded to DCG founder Barry Silbert with another post : "You are here again, stop pretending that you and DCG are innocent bystanders and did not participate in creating this chaos. This is too hypocritical So. If DCG didn’t borrow the money, how did it default on $1.675 billion to Genesis? And that promissory note, would you like to commit to paying it when it comes due on January 8?”
Twitter user Andrew tweeted, “It is expected that the encrypted trading platform Gemini will soon force Genesis Trading into bankruptcy proceedings, and the bankruptcy of Genesis will trigger the liquidation of DCG assets (based on redeemable loans), DCG may go bankrupt, and Grayscale Trust assets will are at serious risk.”
The current problem facing Genesis is whether it can join forces with DCG to repay the loan owed to Gemini, which is still uncertain.
03 What are the best and worst outcomes?
Because the two parties hold their own opinions now, and the specific asset status is unknown to the outside world, we will make assumptions based on the statements of each party.
1) According to Genesis, in the case of arrears of only US$175 million, the processing plan is currently speculated as the following three:
- DCG continues to provide assistance
- bankruptcy reorganization
- Liquidation
The first two results will not have any direct impact on the market. The worst case is to liquidate Genesis. Will Genesis sell GBTC/ETHE to repay debts?
The answer is no. The source of Genesis’s GBTC/ETHE is the collateral of Three Arrows Capital, and the liquidation was completed when DCG provided him with support. The $175 million affected by FTX is other trapped funds and has nothing to do with GBTC/ETHE.
What if Genesis holds GBTC/ETHE for other reasons?
It is also impossible, because GBTC/ETHE has sufficient information disclosure. At present, the largest holder of GBTC is the ARK fund of Mu Mujie, which holds about 60 million. Genesis does not appear on the list, which means that Genesis does not have GBTC/ETHE ETHE can be used for sell-offs.
If GBTC/ETHE can really be converted into ETF to achieve two-way exchange, will it cause GBTC/ETHE to smash the market?
It is also not possible, because once there is such an expectation, the price difference between GBTC/ETHE and BTC/ ETH will be quickly smoothed out by arbitrageurs on the market. In the end, there may only be a small price difference, and GBTC/ETHE is still in circulation on the market.
So now to sum up, if Genesis goes bankrupt, it will be independent, basically it will not affect Greyscale, and Genesis does not have any ETHE/GBTC to sell, so it will not affect ETHE/GBTC, even if ETHE /GBTC sells, it will There is a market to balance and it will not affect the price of BTC/ ETH .
2) What if Genesis owed more than just $175 million?
CoinDesk quoted sources as saying that in addition to Genesis owed $900 million to creditors due to the liquidation of Sanjian Capital, the second batch of creditors represented by the law firm Proskauer Rose also had a loan amount of $900 million. The total amount of debt disclosed is US$1.8 billion. Because the third group of loans signed by FTX bankruptcy may be more, some people think that the current Genesis is definitely not only a shortfall of US$175 million, but at least billions of dollars.
It is reported that DCG holds 630,000 bitcoins. If calculated at the current market price of 16,500 bitcoins/coin, the total assets of DCG are about 10.4 billion U.S. dollars, but these 630,000 bitcoins are the assets of DCG and his liabilities.
Because these bitcoins were held by DCG through GBTC, they were worth more than 20 billion U.S. dollars at the time, but now they have shrunk by nearly half. It seems that they have 630,000 bitcoins. In fact, the loss of this holding alone exceeds 10 billion US dollars , how to help its subsidiary Genesis repay Gemini?
Judging from the multi-billion-dollar losses of Genesis, even if DCG sells all Bitcoins to the market, it will not be able to make up for this huge hole, and there are more than one hole, but three:
- One is the multi-billion dollar loss of subsidiary Genesis
- The second is that the same GBTC follows the BTC ratio of nearly half of the floating loss
- The third is that these bitcoins are not DCG's own, but exchanged from market investors in equal amounts, which is strictly speaking a kind of debt.
In other words, if DCG really chooses to sell the bitcoins it holds to the market , such a sluggish inner market will not be able to withstand the impact of a huge influx of bitcoins, which will only lead to a further market plunge.
04 What do KOLs think?
In this regard, many encrypted KOLs expressed their views on this incident:
- Founder of trading platform BitMEX: People blindly trust DCG because the founder is white
As early as November 28, 2022, BitMEX founder Arthur Hayes published a continuation of his "White Youth" series of blog posts, discussing the causes and consequences of the rise of DCG founder Barry Silbert.
It is pointed out in the article that in the early stage of BTC development, due to the lack of direct compliance investment, Silbert used the trust fund to build a moat for entry, and because of its monopoly position, GBTC always enjoys a super high management fee of 2%, and Silbert can He gained the trust of many parties at the beginning because he was a "white financier".
Today, DCG is in jeopardy because Genesis lent Bitcoin to Three Arrows Capital to generate GBTC to earn a premium, and then the price of Bitcoin fell leading to continuous liquidation. As Arthur Hayes concluded in the article, I guess whoever (whoever) lent money to Genesis has turned off the spigot. And once there is no external ammunition supply, the story of the DCG Group will not be far from ending.
- Encrypted asset investment fund Dragonfly Capital partner: Genesis liquidation may force DCG to go bankrupt
On December 12, 2022, Dragonfly Capital partner Haseeb Qureshi said on Unchained that Genesis creditors may ask DCG to redeem Genesis’s $1.1 billion worth of ten-year notes, which will trigger DCG’s Liquidity to dry up and lead to its bankruptcy. For now, the extended silence from Genesis creditors may mean it is giving DCG and Genesis time to resolve the issue.
- VanEck Director of Digital Asset Strategy: DCG Should Sell Equity to Compensate Genesis Creditors
Gabor Gurbacs, director of digital asset strategy at VanEck, a New York-based investment management company, commented on the matter, saying, “In my personal opinion, the solution is: DCG should sell equity and compensate Genesis creditors. This is an honest and sensible approach. My The guess is that if sellers are willing, there will be willing buyers. Serious buyers may want control.”
- Messari founder Ryan Selkis: Trust assets will not be at risk.
- Yu Jianing, co-chairman of the China Communications Industry Association Blockchain Special Committee, analyzed that: Genesis is likely to face bankruptcy, but the most important thing depends on how GBTC will develop in the future
Yu Jianing analyzed that: "If Genesis cannot raise funds to alleviate the crisis in the near future, it is very likely that it will eventually face bankruptcy. If Genesis goes bankrupt, it will inevitably have some impact on DCG's business and the encryption industry, but the most important thing is It depends on how the Grayscale Bitcoin Trust Fund GBTC will develop in the future.”
"If both Genesis and DCG apply for bankruptcy liquidation, just as the failure of Luna, Three Arrows Capital, and FTX has a chain impact on many institutions in the encryption market, the two will also affect the normal operation of many institutions, and it can even be said that to a certain extent The subsequent impact of the above may be more far-reaching than the bankruptcy of the previous few.”
- Zhao Wei, a senior researcher at the Ouyi Research Institute, said: If DCG is thunderstormed, it will have a further negative impact on the encryption industry
Zhao Wei said that once the DCG thunderstorms, the negative impact on the encryption industry will be no less than that of the FTX and LUNA events. Further harm makes traditional financial institutions discouraged.
- Chuan Wang from Silicon Valley: The loss of goodwill caused by Genesis' inability to pay is far greater than the previous income.
Chuan Wang from Silicon Valley said that it is said that Gemini takes 2-3% of the annual commission from this project, and the customer deposit of 900 million US dollars is about 20 million US dollars a year. However, the loss of goodwill caused by Genesis' inability to pay is much greater than the previous income.
- Twitter user Karl said: MakerDAO may be implicated
Currently, MakerDAO holds 82% of the GUSD supply after partnering with Gemini for a 1.25% yield. What if some of the Gemini Earn assets that were supposed to back GUSD were lent to Genesis and they lost it, so the Stablecoin is no longer fully backed? How does this affect MakerDAO? Cameron's tweet today clearly means that things are much worse for Gemini than people initially thought. How will they honor redemptions if the funds that were supposed to back them no longer exist?
- Zhu Su: DCG suffered huge losses due to the bankruptcy of Sanjian last summer, and filled the loopholes by "left hand and right hand"
Zhu Su, co-founder of Three Arrows Capital, posted on social media: “DCG and FTX conspired to attack LUNA and stETH, and made a lot of money in the process. Last summer, DCG suffered huge losses due to the bankruptcy of Three Arrows Capital, and Babel The same goes for Finance and other companies involved in GBTC.
DCG, like FTX, has been misleading customers for the past few months and has also used various methods to attack Three Arrows Capital. No one asked how Genesis plugged the hole. And all the while taking more deposits while being insolvent and hoping the market price goes up. DCG is now worthless and involved in criminal fraud, and FTX creditors also have evidence of a fraudulent transfer of Alameda's return of capital to Genesis.
Most people in the industry know that DCG founder Barry and SBF have been close since the beginning (SBF was on the board of Genesis and gave him the first FTT-backed loan). Creditors of Genesis, who will push it into bankruptcy in the next few days and take over the remaining DCG assets, will likely demand that Barry pay off his cash the easy way instead of waiting for a criminal case and restitution penalty from the DOJ. "
05 Summary
FUD in the bull market may be harmless, but the downturn in the bear market is shrouded in the fear of black swans such as Luna, Three Arrows, and FTX. FUD is like a poison that erodes people's hearts and makes people panic.
The market seems to be waiting for a directional choice. The price of Bitcoin has been consolidating around $16,500 for eight consecutive weeks, neither breaking through nor turning down. And where the market will go in the future, the direction of the DCG event may become the key.
