Could DCG Be The Catalyst For Maximum Pain In Crypto Markets?

Following the recent collapse of FTX, the fallout spread to Genesis, which had been bailed out by parent company Digital Currency Group (DCG) earlier this year following the failure of Three Arrows Capital.

There are growing concerns about the possibility of the contagion spreading to Greyscale Bitcoin Trust and the Digital Currency Group, but are these fears justified?

Genesis & Digital Currency Group

According to Nathaniel Whittemore speaking on the CoinDesk podcast, The breakdown, DCG is a $1.2 billion creditor to Three Arrows Capital. For transparency, CoinDesk is owned by DCG.

Genesis recently announced that payouts from its Genesis Earn program would be suspended. Also, news then started circulating that the company might be there fault amounting to 1 billion dollars. According to a Wall Street Journal articleThe company sought a $1 billion loan after FTX collapsed, but no deal was closed.

Adam Cochran, partner at VC firm Cinneamhain Ventures, collapsed DCG’s assets to assess whether a potential $1 billion hole in its balance sheet would likely cause further pain in crypto markets.

DCG-owned companies in particular could be at risk of further contagion in their portfolio, including crypto custodians, BitGo, Web3 browser, Brave, USDC issuer, Circle, crypto news organization, CoinDesk and many other core crypto projects breaking the heartbeat from form the branch.

Should DCG continue to struggle, the impact on the entire industry could be catastrophic. ArchPublic co-founder Andrew Parish claimed on Nov. 20 that there were “zero takers” for Genesis’ funding proposal, including rejections from the major crypto-focused VC firms.

parish posted a To update a few hours later, claiming that B2C2 was “possibly” open to a “very small” investment to cover part of Genesis’ loan book.

A collapse of Genesis could have a much bigger impact on the entire crypto industry than FTX. Genesis is a critical piece of institutional infrastructure currently in place in the crypto industry. The company was the first OTC Bitcoin Trading desk created in 2013. In 2020then-CEO Michael Moro claimed that Genesis was on track to become “on par with the world’s leading financial institutions.”

Digital currency group assets

Cochran outlined the baseline of DCG’s “empire,” which will reach approximately $38 billion in assets under management by 2021.

In addition, Cochran estimated the following approximate breakdown of DCG holdings in its portfolio based on certain assumptions of its past investments.

DCG assets
Source: Adam Cochran

Genesis and Greyscale relationship confusion

It is important to note that as of October 2022, Genesis will no longer a Attendees in the Greyscale Bitcoin Trust, but “will continue to serve as the liquidity provider for Grayscale.”

On November 16, however, Greyscale distant moves further away from Genesis as it announced that its assets are now held at Coinbase and that Genesis “is not a counterparty or service provider for any Grayscale product.”

However, the statement contradicts a previous statement as of Oct. 3, when Grayscale CEO Michael Sonnenshein told CoinDesk that Genesis is its “sole liquidity provider” and sees no need to diversify.

“Today, Genesis remains our only liquidity provider and we have only had a positive relationship with them since 2013, so I see no need for expansion.”

Sonnenshein added that “Genesis will continue to purchase the cryptocurrencies underlying Grayscale’s trusts.” There have been no further announcements on Greyscale’s official news channel regarding Genesis’ removal from this position.

Greyscale defines its need for “liquidity providers” as a means to ensure “investments are made”.

“Working with a liquidity provider like Genesis allows us to tap different markets for digital assets or protocols to ensure investments are made in a timely manner. “

The fine print on Greyscale’s website includes a notice that their products are distributed by Greyscale Securities and that “prior to October 3, 2022, the products were distributed by Genesis Global Trading, Inc.”

Confusingly, however, a statement released by Greyscale on November 18 reiterated Greyscale’s lack of contact with Genesis some 56 days later.

“No other company, including DCG, Genesis or any other Grayscale affiliate, controls the digital assets underlying Grayscale products.”

Given that Genesis had been confirmed less than two months earlier as the liquidity provider tasked with “purchasing the cryptocurrencies underlying Grayscale’s trusts,” it is difficult to pinpoint Genesis and DCG’s precise commitment to this determine time.

Genesis appears to have had a bullish outlook on the future of bitcoin’s price discovery of late, as the company’s strategists failed to name the top of bitcoin. Strategist at Genesis in November 2021 claims that bitcoin price’s small dip from $69,000 to $55,000 was simply a “natural breather.” Since the statement, Bitcoin is down another 70% and is trading below $17,000.

Currently the Greyscale Bitcoin Trust trade at a 43% discount to its net asset value (NAV), meaning the bitcoins held under the trust are currently worth around $9,300.

The collapse of the DCG fortune

Cochran then assessed the potential real value of each part of the DCG portfolio and examined the available liquidity within each investment. Cochran made multiple guesses to create ratings for each item, so all numbers should be considered hypothetical using publicly available information and his own professional insight.

However, Cochran concluded that DCG would likely need to sell equity, venture capital, liquid crypto assets, or one of its flagship brands to raise $1 billion.

Former Goldman Sachs trader Patrick Feeney supported the claim that Greyscale and later DCG are in trouble. Feeney Expectations for avoiding the FTX meltdown by analyzing Sam Bankman-Fried’s body language and escaping “MtGox, BTC-e, Cryptsy, Cryptopia”.

Feeney argued that DCG and Greyscale are in a “difficult position” with a lack of liquidity and “outrageous credit problems.”

Cochran concluded that DCG may have to rely on someone “overpaying” for some of their GBTC or Genesis holdings to avoid further problems.

Arthur Hayes contributed to the discussion share a medium article by DataFinnovation. It says so in the summary of the article

“It looks like DCG and 3AC were involved in some sort of plan to extract value from the GBTC bounty.”

The article broke down publicly available data to claim that Genesis, DCG, Greyscale, and 3AC created a circular infrastructure to borrow and lend BTC to make GBTC stock and “extract money from the GBTC premium.” .

3ac Genesis Grayscale
Source: DataFinnovation

Given that both Greyscale and Genesis are registered with the SEC, DataFinnovation argued that “it won’t be hard for regulators to figure this out.” While some of what is discussed in the above analysis could be considered speculation, DataFinnovation makes a salient point. Since the invested parties are obviously subject to regulatory oversight, the truth is likely to emerge. The question is, what impact will it have on the global crypto markets?

Bear Market Blues

Crypto bear markets are notoriously tough. For example, in 2018, the industry’s global market cap fell from $828 billion in January 2018 to a low of just $100 billion in September 2018. The drop represented an 87% fall in overall market cap.

On November 9, 2021, the total crypto industry market cap reached $2.8 trillion. However, as of press time, its market cap is down 70% to $831 billion. Therefore, the 2018 bear market bottom was 17% lower than today. A capitulation equivalent to the 2018 collapse would bring the current global market cap to just $350 billion.

Should DCG, Greyscale, or Genesis end up in insurmountable financial distress, a new catalyst for the market to test the 2018 lows could enter the arena.

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