D-Day Looms Over Bitcoin: Are DCG/Genesis Going Bankrupt?

The question of whether Genesis Trading and Digital Currency Group (DCG) will fail currently hangs over the cryptocurrency and Bitcoin market like a sword of Damocles. In the event of bankruptcy, DCG may be forced to liquidate its cash cow, Grayscale and its Grayscale Bitcoin Trust (GBTC).

But how likely is that to happen? To answer this question, it is extremely important to understand what the three companies are, how they are related and what obligations they have to each other. Also, let’s take a look at the rumors that have been circulating over the past few days and try to determine their veracity.

Why could today be a D-Day for Bitcoin?

DCG is one of the most prominent companies in the cryptocurrency industry and the parent company of several well-known cryptocurrency companies, including Genesis and Grayscale.

Genesis is the only full-service prime broker in the crypto space and has been a jewel in DCG’s portfolio. The firm plays a vital role in providing access and managing risk for large institutions.

However, he was already reeling after the collapse of Three Arrows Capital (3AC) and was bailed out by DCG. The parent company is now a $1.2 billion creditor of 3AC.

Genesis announced late last week that it would be suspending payments for its Genesis Earn program. As a result, it was revealed that the company would need a $1 billion cash infusion by today, Monday.

If Genesis is unable to raise this amount from outside backers, things could go badly for DCG and, by extension, Grayscale, according to rumors. The Grayscale Bitcoin Trust currently holds 634,000 BTC which could reportedly be liquidated, putting massive selling pressure on the Bitcoin market.

One of the main sources for current rumors is Andrew Parish, co-founder of ArchPublic. He says there are “zero interested parties” for Genesis.

How legit this source is, however, is being questioned in the crypto community. Analyst Dylan LeClair expressed doubts about him and advised taking this guy’s sources with a grain of salt.

Assuming that Genesis effectively fails to attract capital, DCG could be forced to sell shares and part of its portfolio. Adam Cochran, a partner at venture capital firm Cinneamhain Ventures, looked at DCG’s assets to see if it could fill the $1 billion hole on its own.

DCG may try to sell companies in its portfolio, including Luno, Foundry and Coindesk, as well as a sizeable venture capital portfolio. However, Cochran believes the $1 billion is very optimistic and said, “as a VC, there’s not much I would bid on with a secondary.”

Cochran went on to explain that Grayscale, Genesis, and Luno – in that order – will likely be DCG’s top priorities. So to get to $1 billion, they would have to sell some equity, all of their ventures, all liquid assets and Luno/Coindesk/Foundry (if it has any value), according to Cochran.

Ultimately, DCG would have to throw everything overboard to save his golden goose. Only if that fails would a liquidation of the Grayscale Bitcoin Trust be on the table.

My guess is that if we get any news this week other than a round close, that means most of this stuff will be sold. And if they can’t get the boost in time, then they should try to take out Grayscale himself.

But even that may not be easy. Admittedly, Grayscale has already dissolved its trust in XRP in the past. However, this was in light of the lawsuit filed by the US Securities and Exchange Commission against Ripple Labs.

QCP Capital noted in its latest report that “those who expect GBTC to allow a one-time redemption for Genesis to meet liquidity needs are misled, as this must be done with SEC approval.” Given the SEC’s opposition to GBTC this year, QCP Capital doesn’t expect that to happen any time soon.

Ram Ahluwalia, CEO of Lumida Wealth Management, meanwhile, valued that “the right move for Genesis is an acquisition”. Potential buyers could include GS, ICE or a consortium of investment banks. Ahluwalia said:

It won’t be easy: principal risk, regulatory scrutiny, asset quality questions, risk aversion climate, etc. (MS, Merrill, CS, Deutsche and Jefferies would not do this for various reasons).

If there’s no buyer, DCG would have to plug the hole, which Ahluwalia says it won’t do because the business isn’t profitable. “That would mean an organized bankruptcy of the Genesis credit subsidiary,” she said.

At press time, Bitcoin investors appeared to be very volatile and in a de-risk mode. Bitcoin price fell to $16,000, close to the bear market low of $15,675.

Bitcoin price faces major support levels, 1-hour chart. Source: TradingView

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