Crypto investor DCG reveals web 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 across billionaire Barry Silbert’s empire.

Silbert wrote to shareholders on Tuesday explaining DCG had borrowed $575mn from its broker Genesis, which is now seeking funds to stave off collapse in an accelerating crisis across the industry.

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

DCG lacks the public profile of exchanges such as FTX or Binance, but is one of the biggest and earliest investors in a crypto industry still reeling from this month’s collapse of Sam Bankman-Fried’s FTX. This latest revelation highlights the links across Silbert’s group, which was valued at $10bn last year by investors including SoftBank, Singapore’s sovereign wealth fund GIC and Google’s venture arm CapitalG.

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

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

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

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

The Grayscale trust units that DCG bought have since dropped sharply in price. The weighted average price of the purchases since March 2021 was $40, according to an FT analysis, but the units closed at $9.23 on Wednesday. DCG said it had other offsetting positions that made its GBTC purchases “market-neutral”.

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

Investing in GBTC had previously generated easy profits for traders because until early 2021 it traded at a premium to the price of the underlying bitcoin asset. The premium had existed because of the demand for bitcoin wrapped in a traditional financial structure.

GBTC now trades at a steep 39 per cent discount to the price of bitcoin. The US Securities and Exchange Commission has repeatedly refused to allow the Grayscale trust to convert into an exchange traded fund structure open to retail investors.

The popularity of GBTC when it traded at a premium, and the ease of trading the units, meant that it was widely used as collateral in crypto lending, including by Genesis itself.

Silbert’s holding company has injected cash into Genesis after a series of high-profile shocks to the industry this year. One came after Genesis lost $1.1bn on a loan to collapsed hedge fund Three Arrows Capital, which pledged GBTC as collateral on the loan. DCG took on Genesis’ liabilities in the process, subsequently owing $1.1bn to Genesis, Silbert said on Tuesday.

More recently, DCG injected $140mn into Genesis hours before FTX filed for bankruptcy. Genesis has since been racing to raise extra new financing and told clients on Wednesday it was working with DCG and exchange Gemini to shore up liquidity.