The cryptocurrency world is home to the largest company group, DCG, which includes dozens of massive crypto companies. These are billion-dollar giants, and their roles in the major crash of 2022 are not yet fully understood. Today, as the bankruptcy process of Genesis continues, DCG subsidiary Grayscale hopes to strengthen its cash flow by converting GBTC to an ETF.
User Vijay Boyapati has decided to examine the role of DCG, the parent company that compiles open-source documents and recent rumors. According to him, a bigger fraud occurred than SBF, the founder of FTX, seizing customer assets.
Vijay first says that we need to go back to 2013 when the GBTC fund was launched. This thing that allows institutions to invest in Bitcoin is a trust. It did not have an ETF-like redemption mechanism, and institutional capital could buy GBTC Trusts, which are divided into the total held <a href="https://en.coin-turk.com/bitcoin-slides-to-29000-as-crypto-market-declines/”>BTC amount, and make BTC investments. If we say that the total held BTC value, that is, the Net Asset Value (NAV), is 1, then the total value of the GBTC funds was always above 1 in the early days. The negative value we mention nowadays represents less than 1. For example, saying that it trades with a -15% negative premium explains that it represents the level of 0.85 (according to the net asset value) instead of 1.
GBTC funds that trade with a positive premium (i.e., above 1) essentially mean that the market value of the fund is higher than its underlying assets (Bitcoins). Stock investors did not have many options, so they were willing to pay extra (safely) to invest only in BTC.
GBTC being traded at a premium to NAV (over 40% at some point) made a highly profitable arbitrage possible. You could give X bitcoins to Grayscale and carry out the arbitrage by short-selling X bitcoins. After 6 months, you could close your position by selling GBTC (which trades at a premium based on X bitcoins). This was called GBTC premium arbitrage.
Many market participants realized how profitable and seemingly risk-free this trade was (since GBTC always traded at a premium to NAV) and started to get involved. Two of these participants, hedge fund Three Arrows Capital (3AC) and lending platform BlockFi, coincidentally both went bankrupt.
Three Arrows Capital not only settled for GBTC premium but also took action to multiply its earnings with leverage. It needed to borrow a large amount of BTC for leverage. How did it do that?
This is where Genesis comes into play. Genesis was one of the subsidiaries owned by DCG. DCG was a parent company created by Barry Silbert to mimic the corporate structure of Berkshire Hathaway and apply it to the crypto market. Along with Grayscale, Genesis was the two valuable companies of DCG.
Genesis, which has become the largest brokerage firm in crypto, was divided into two branches. The first one was the Trading and Derivatives branch, namely GGT, and the other was the lending services called GGC. Genesis collected assets from small and large Bitcoin investors in exchange for interest. It lent the collected BTC to others at a higher interest rate and made a profit from the difference. Don’t banks do that too? The only problem was that banks protected themselves from such high volatility risks and analyzed their customers’ ability to pay.
“At this point, it should be noted that DCG directly controlled GGT (Silbert was the chairman of the board of directors from 2013 to July 2022), and until June 2022, there was no board of directors appointed for GGC, two of the three members of which came from DCG. There was a great motivation for Genesis to encourage the provision of bitcoin loans to be used in GBTC arbitrage transactions. These assets would flow into Grayscale and then get stuck there. We mentioned that there is no redemption mechanism.”
When these bitcoins got stuck, Grayscale would collect a large fee of 2% per year to “manage” the fund (actually do nothing). Currently, GBTC has over 620,000 bitcoins, so Grayscale earns more than 12,000 BTC as an annual fee. The profits obtained from Grayscale flow to the parent company DCG. Perhaps you are now realizing some significant conflicts of interest between DCG, Grayscale, and Genesis.”
In the image below, you can see Grayscale CEO Michael signing a loan given by Genesis to Three Arrows Capital. The claim expressed by Barry Silbert that conflicts of interest are observed among family companies is therefore ridiculous.
Between February 18-23, the GBTC premium turned negative for the first time. This was actually a sign of a major breakdown in the system. Because competition was increasing, MicroStrategy had started to fill its reserves with BTC in a smart move, and MSTR shares were gaining popularity as a Spot Bitcoin ETF. Futures ETFs also contributed to the negative premium of GBTC due to the increasing interest in crypto stocks.
Since 2021, the GBTC premium has never turned positive and has fallen to levels of up to 50% below its historical low.
These were the step-by-step events. Genesis was a huge zero in terms of risk management, and we had mentioned that it also lent to FTX by looking at fake balance sheets.
If the organizations to which you have lent go bankrupt, you cannot pay the balances you have collected in debt in return for interest to the customers. At this point, the most accurate thing to do was for the CEO of Genesis to declare bankruptcy.
Genesis’ bankruptcy finally came to light when FTX collapsed in November 2022 and all customers panicked and tried to withdraw their BTC assets to cold wallets. Genesis could not meet its customers’ withdrawal requests and froze withdrawal transactions on November 16, 2022. At that time, DCG/Genesis claimed that what caused the temporary freezing of its customers’ funds was the collapse of FTX and the accompanying market chaos.
“The truth was that Genesis had been bankrupt since June of that year. Even after freezing withdrawal transactions, Genesis claimed that it had not gone bankrupt. In other words, it had enough capital to meet withdrawal requests, but it was not immediately available. This was extremely misleading.”
On January 19, 2023, Genesis had to declare bankruptcy and gradually revealed the extent of its fraud to its creditors. On October 19, 2023, the New York Attorney General filed a criminal complaint against Genesis, DCG, and Barry Silbert and Michael Moro personally.
Genesis’ collapse bears many similarities to the FTX fraud.
As the US prosecutor stated in the FTX case, making false and fraudulent statements is a serious crime, and DCG did that with its subsidiaries. DCG will probably struggle in the midst of a major lawsuit with new witnesses in the coming period. This poses a serious risk for cryptocurrencies. The New York Attorney General already has a witness who worked at Genesis and cooperated.