How GBTC’s premium business ruined his DCG empire Barry Silbert and took crypto lending platforms with them.

Introduction to the digital currency group

The Digital Currency Group was founded by Barry Silbert in 2011.

dcg portfolio
Digital Currency Portfolio: (Source: DCG)

However, the most important company in DCG’s portfolio is Greyscale Investments, the world’s largest bitcoin owner, aside from Satoshi Nakomoto.

Large Bitcoin containers
Largest Bitcoin Holders: (Source: River Financial)

GBTC holds the equivalent of 633K BTC, over 3% of Bitcoin’s circulating supply. The trust’s net asset value (NAV) at the time of writing is around $10.5 billion.

BTC custody is handled by Coinbase Custody. However, Coinbase is yet to confirm if they have control of BTC. However, since Coinbase trades as a public company in the US and is therefore subject to audit, BTC is likely to be kept within normal practices.


How does DCG make money?

DCG charges a 2% management fee for the underlying Bitcoin held in the trust.

According to SEC filings in Q3 2022, DCG received $68 million from this fee, bringing annual revenue to $230 million. The revenue represents a large percentage of the $800 million it generates annually. Barry Silbert He confirmed these numbers in a Nov. 22 letter to shareholders.

GBTC, for a while, was the only way US investors could gain exposure to IRAs or 401k accounts, which is one reason it has traded up as much as 40 percent over the years.

Although GBTC is considered safe, it doesn’t have the security risks of holding your keys for BTC. As demand grows, so do assets under management, with a bull run expected to top $40 billion by 2021.

Assets under management in general
Total Assets Under Management: (Source: YCharts)

Premium and discount

GBTC trades at a premium when stocks exchange at a higher price than the original BTC. Conversely, if GBTC shares are below NAV, GBTC is considered discounted.

In the year

The reason for the decline can be seen in the increased competition from Bitcoin futures ETFs. The Valkyrie Bitcoin Strategy Futures ETF (BTF) and Canadian Objective Bitcoin ETF holdings are two of the main contenders during the November 2021 bull run. The Bitcoin ETF aims to hold 50k BTC by June 2022 but currently only has 24k BTC. In addition, these funds and others offer a small management fee, which eliminates the need for GBTC.

Purpose Bitcoin ETF Holdings
Objective Bitcoin ETF Holdings: (Source: Glassnode)

GBTC’s decline is currently at a high of 48%, following a fall to a low of 50%, the largest decline on record. The issue with holding GBTC is the mandatory 6-month lock-up of GBTC shares, making it highly illegal. Additionally, when the offering grows, investors cannot redeem shares. Moreover, since BTC paper is derived, holders do not own the actual BTC.

GBTC Premium/Discount
GBTC Premium/Discount: (Source: TradingView)

From March 2021 to June 2022, the digital currency group bought nearly $800 million worth of GBTC shares after they began trading at a discount to NAV. As a result, the firm owned approximately 10 percent of the trust’s outstanding shares.

The decline in GBTC buying pressured institutional selling and artificially boosted the fund’s NAV. DCG issued GBTC and tried to protect the value of GBTC by acquiring GBTC using leverage.

One might ask if this FTX is different from issuing FTT tokens and trying to protect it using the token. FTT and GBTC were the largest components of FTX and DCG balance sheets, respectively.

Grayscale offers other similar trusts for alternative crypto assets. For example, Grayscale Ethereum Trust (ETHE) is currently trading at a significant discount, and since January 3, the fund’s discount to NAV has dropped to 60%.

Gray investment products
Gray Investment Products: (Source: DCG)

Genesis and credit platforms

Several failed crypto companies, such as 3AC and BlockFi, had significant exposure to GBTC shares.

In the year By 2021, 3AC had a significant position in GBTC shares of approximately 40 million, valued at $1.3 billion. To put that in perspective, Arch Invest is now the largest shareholder outside of DCG, with just under 1% of its offering, equivalent to 6.5 million shares.

GBTC Holdings: (Source: Bloomberg Terminal)

With the GBTC premium rising to 40%, companies like 3AC and BlockFi are back to speculating on the market. This is how BlockFi is allowed to offer such a high yield to customers. When the lockout ended every six months, it allowed these companies to continue making profits, while Genesis was happy to continue lending to companies like 3AC.

3AC took over 50% of Genesis’ loan book from another DCG company, Genesis, with a $2.36 billion loan. The loan is made of illegal cryptocurrencies and paper derivatives of Bitcoin and Ether.

In total, Genesis’ loan to 3AC was backed by 17 million shares from GBTC. Grayscale is a subsidiary of DCG with 446,000 shares in the Grayscale Ethereum Trust, 2 million Avalanche (AVAX) native tokens and 13 million NEAR tokens.

Genesis loan to 3AC
Genesis Credit for 3AC: (Source: Bitcoinist)

ETF

Barry Silbert and DCGG have been pleading with the SEC for years to convert GBTC to ETFs. An ETF would track the underlying product, and there would be no premium or discount as the NAV of the shares would be taken, and management fees would be much lower.

SEC continues to reject spot ETFs to protect investors Converting to a spot ETF will see any investor who bought at a discount make a profit as it moves to NAV.

EFAs are safer and more transparent than closed-end funds, with no premiums or discounts and lower fees. However, the SEC has approved futures ETFs and a short Bitcoin Strategy ETF (BITI).

Grayscale is now suing the SEC, but the SEC rejected Grayscale, NYDIG, Wisdom Tree and other institutions. As a result, many countries around the world have seen ETFs approved in Europe, Canada and Africa.

Greyscale’s ongoing lawsuit with the SEC has a short deadline of Feb. 3 before a ruling on the ETF-related lawsuit.


The SEC failed to help investors

When the GBTC premium ended, crypto lending platforms exploded after the crypto ecosystem exploded, as these funds and lenders had to climb the risk curve to remain profitable and satisfy their consumers.

The SEC has repeatedly failed to approve ETFs for the GBTC space, which could prevent the deadline from starting day one and potentially result in the loss of such leverage. As a result, there would be no GBTC premium, and these firms would not be able to leverage as much as they have grown in size.

Grayscale was doing everything they could to get the spot ETF approved.

SEC rejects spot ETF for spot bitcoin fraud However, endorsing a CME Bitcoin Futures ETF that does not track the underlying spot price can become vulnerable to manipulation and fraud just as quickly.

As mentioned above, there are a number of location ETFs around the world in Europe and Africa, for example. This has undoubtedly seen capital flow out of the US and into these states.


Where are we now in 2023?

If DCG enters bankruptcy, the company may be forced to liquidate its assets and see large-scale sales in GBTC and ETHC. This will put significant selling pressure on Bitcoin and Ethereum.

However, according to Ryan Selkis, CEO of blockchain research firm Messari, the controlling shareholder of Greyscale Bitcoin Trust’s (GBTC) Genesis Global and Digital Currency Group cannot simply “dump” its holdings to raise more capital.

Bans were imposed in 2010. It is Rule 144A of the US Securities Act of 1933, which requires entities trading, without fees or OTC, to give notice of the proposed sale and the quarterly sale capital of 1% of the outstanding stock or weekly trading volume.

One obvious option that DCG can take is to launch Reg M, which allows investors to redeem shares at NAV, to narrow the current discount gap.

On January 2, Cameron Winklevoss published an open letter to DCG CEO Barry Silbert, in which he questioned Barry’s strategy for delaying Genesis’ $900m debt to Gemini’s beneficiaries. In addition, Cameron accuses Barry of using NAV’s business methods, which Barry uses personally. The letter ended with Cameron Winklevoss telling Barry Silbert to find a solution by January 8th.

However, the letter did not state that DCG and Barry responded; A possible win-win situation is for DCG to file for Chapter 11.

On December 28, investment advisor Valkyrie proposed to become GBTC’s new sponsor and manager, as well as launch a fund to use the discounted crypto..

As rumors continue to circulate, DCG/Genesis is under active investigation by the SEC. Sources confirmed that several whistleblowers have come forward.

The current D.C.G

  • Genesis is currently considering bankruptcy.
  • DCG established a wealth management subsidiary
  • DCG owes $2.025B.
  • Genesis can call their $1.675B loan.
  • Genesis for Gemini 900 million

What can we learn from all this?

Bitcoin is a non-bearer digital asset with no counterparty risk; If you handle yourself properly, no benefit or gain will occur. However, investors are personally responsible for managing their money.

Humanity’s number one issue is often greed, which history tells us often leads to fraud, fraud and centralism. By properly protecting your Bitcoin, you own Bitcoin, not an IOU or paper derivative.

In the year As we have seen in 2022, with funds chasing higher yields and the associated risks of using Bitcoin to chase yields, these companies are taking an ‘any way’ approach.

You’ll learn from this lesson, but due diligence is always critical, which is why the phrase “your coins, not your keys” is so prevalent in the Bitcoin ecosystem.


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