Crypto investor DCG reveals a network of investments between units

Crypto conglomerate Digital Currency Group used funds it borrowed from its struggling Genesis unit to invest in another subsidiary’s products, highlighting the delicate links 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 in the growing industry crisis.

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

DCG doesn’t have the public profile of exchanges like FTKS or Binance, but is one of the biggest and earliest investors in the crypto industry still reeling from this month’s Sam Bankman-Fried collapse of FTKS. The latest revelation underscores the ties between Silbert’s group, which was valued at $10 billion last year by investors including SoftBank, Singapore’s sovereign wealth fund GIC and Google’s CapitalG unit.

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

Since March 2021, DCG has spent $772 million buying units of Graiscale Bitcoin Trust (GBTC) in the open market, according to US Securities and Exchange Commission data. Some of DCG’s purchases were financed with US dollars and bitcoins the group borrowed from Genesis Trading, DCG told the FT.

Silbert told investors that DCG borrowed $575 million from Genesis “on an arm’s length basis” to finance undisclosed “investment opportunities” and buy back DCG shares from non-employee shareholders.

DCG later told the FT that “part” of the loan from Genesis was used to finance the purchase of GBTC, and $300 million was spent on share buybacks.

The grayscale trust units purchased by DCG have since fallen sharply in price. The weighted average price of purchases since March 2021 was $40, according to FT analysis, but units closed at $9.23 on Wednesday. DCG said it had other positions that made its GBTC purchases “market neutral.”

Until October of this year, traders who wanted to deposit bitcoin into the Graiscale fund in exchange for more easily tradable GBTC units had to use Genesis as the exclusive issuing agent. The Graiscale trust pays an annual fee of 2 per cent of its assets under management to DCG-owned Graiscale.

Investing in GBTC has previously generated easy profits for 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 bitcoins wrapped in a traditional financial structure.

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

The popularity of GBTC 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 injected cash into Genesis after a series of major shocks to the industry this year. One came after Genesis lost $1.1 billion on a loan to failed hedge fund Three Arrows Capital, which had pledged GBTC as collateral for the loan. DCG assumed Genesis’ liabilities in the process, leaving it owing $1.1 billion to Genesis, Silbert said Tuesday.

Recently, DCG injected $140 million into Genesis hours before FTKS filed for bankruptcy. Genesis has since raced to raise additional new funding and told clients on Wednesday it was working with DCG and the Gemini exchange to boost liquidity.

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