Crypto investor DCG reveals a web of investments between entities

Crypto conglomerate Digital Currency Group used funds it borrowed from its troubled Genesis unit to invest in another subsidiary's products, highlighting the delicate ties in billionaire Barry Silbert's empire.

Silbert wrote to shareholders on Tuesday, saying DCG had borrowed $575 million from its broker Genesis, which is now seeking funds to stave off collapse amid an accelerating crisis across 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 companies, which operates a U.S.-listed trust that tracks the price of Bitcoin.

DCG doesn't have the public profile of exchanges like FTX or Binance, but is one of the largest and earliest investors in a crypto industry still reeling from the collapse of Sam Bankman-Fried's FTX this month. This latest revelation highlights connections within the Silbert Group, which was valued at $10 billion last year by investors including SoftBank, Singapore's sovereign wealth fund GIC and Google's venture arm CapitalG.

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

DCG has spent $772 million on open market purchases of Grayscale Bitcoin Trust (GBTC) shares since March 2021, according to U.S. securities filings. Some of DCG's purchases were funded with US dollars and Bitcoin that the group borrowed from Genesis Trading, DCG told the FT.

Silbert told investors that DCG borrowed $575 million from Genesis "at arm's length" to fund undisclosed "investment opportunities" and to repurchase DCG shares from non-employee shareholders.

DCG then told the FT that “some” of Genesis’ borrowing was used to fund the GBTC purchases and $300 million was spent on the 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 has other offsetting positions that make its GBTC purchases “market neutral.”

Until October of this year, traders 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 issuance agent. The Grayscale Trust pays an annual fee of 2 percent of its assets under management to Grayscale, which is owned by DCG.

Investing in GBTC had previously brought traders easy profits as it traded at a premium to the price of the underlying Bitcoin asset until early 2021. The premium was created due to the demand for Bitcoin in a traditional financial structure.

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

GBTC's popularity when it traded at a premium and the ease of trading the units led to it being widely used as collateral in crypto lending, including by Genesis itself.

Silbert's holding company pumped money 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 took over Genesis' liabilities and subsequently owed Genesis $1.1 billion, Silbert said on Tuesday.

More recently, DCG injected $140 million into Genesis hours before FTX filed for bankruptcy. Genesis has since been seeking additional new funding and told customers on Wednesday that it is working with DCG and Exchange Gemini to support liquidity.