In a note to shareholders on Tuesday, Silbert addressed all the “noise” about the financial health of DCG’s subsidiaries, including trading firm Genesis, Grayscale Investments and mining firm Foundry.
Since the rapid shutdown of FTX two weeks ago, investors have worried about a cryptocurrency contagion that would affect every corner of the industry. Lenders have stopped lending, withdrawals have been more difficult and unregulated, poorly understood tokens have lost value. The main cryptocurrencies, bitcoins And etherthey also continued their one-year descent.
Silbert, an early bitcoin evangelist who founded DCG in 2015, said that despite the cryptocurrency winter, the overall company is on track to generate $800 million in revenue this year thanks to just $25 million raised in primary capital from the beginning. Forbes estimates Silbert’s net worth at $2 billion.
“We have weathered previous crypto winters,” Silbert wrote, adding that “while this one might feel tougher, collectively we will come out stronger.”
Similarly Coinbase, Binance, and Crypto.com have done their best to allay customer concerns to avoid an FTX-like rush on customer deposits. Each of them expressed shock at FTX’s apparent deception of investors and clients and stressed that clients’ assets are safe.
All this with the knowledge that FTX and founder Sam Bankman-Fried have betrayed the trust of an industry that was already in the midst of a brutal year of losses. Bankman-Fried said his company’s assets were “in order” two days before he was desperate for a bailout amid a liquidity crunch.
Specific to DCG, investor confidence took a hit in the past week when The Wall Street Journal reported that Genesis had tried to raise $1 billion from investors before eventually halting some withdrawals. There were reports that Genesis would soon be filing for bankruptcy, which the company has publicly refuted.
Fear has spread to the Grayscale Bitcoin Trust, known for its ticker GBTC, which allows investors to access bitcoin through more traditional security. GBTC is currently trading at a 42% discount to bitcoin, up from a discount of close to 30% two months ago.
Regarding Genesis’ lending business, Silbert said in the letter that the suspension of repayments and the granting of new loans on Nov. 16 was “a matter of liquidity discrepancy and duration” in the loan book. These issues, he said, had “no impact” on Genesis’ spot and derivatives trading or custody businesses, which are “continuing to operate as usual.”
He acknowledged that Genesis has been hiring financial and legal advisers, as the company considers its options.
DCG’s debts total just over $2 billion. The company lent Genesis about $575 million, priced at “prevailing market interest rates,” which is due in May 2023. It also absorbed the $1.1 billion in debt that the bankrupt crypto hedge fund Three Arrows Capital owed to Genesis.
With Three Arrows bankrupt, DCG “is pursuing all available remedies to recover assets for the benefit of creditors,” Silbert wrote. DCG’s only other debt is a $350 million line of credit from “a small group of lenders led by Eldridge.”
Read Silbert’s full letter below:
There has been a lot of noise over the last week and I want to get in touch directly to clarify where we stand at DCG.
Most of you are aware of the situation at Genesis, but to recap ahead of time: Genesis Global Capital, the lending business of Genesis, temporarily suspended redemptions and new loan origins last Wednesday, November 16 after the Market turmoil has triggered unprecedented withdrawal requests. This is a liquidity and term mismatch issue in the Genesis loan book. Importantly, these issues do not impact Genesis’ spot and derivatives trading or custody businesses, which continue to operate as usual. Genesis’ leadership and their board have agreed to hire financial and legal advisers, and the company is exploring all possible options amid the fallout from the FTX implosion.
In recent days there has been talk of intercompany loans between Genesis Global Capital and DCG. For the uninitiated, in the normal course of business, DCG has borrowed money from Genesis Global Capital in the same way as hundreds of cryptocurrency investment firms. These loans have always been structured on market terms and valued at prevailing market interest rates. DCG currently has a liability to Genesis Global Capital of ~$575 million, due May 2023. These loans have been used to fund investment opportunities and to repurchase DCG shares from non-employee shareholders in secondary transactions previously highlighted in the quarterly updates of the shareholders. And to this day, I have never sold a share of my DCG stock.
You may also recall that there is a $1.1 billion IOU due in June 2032. As we shared in our previous letter to shareholders in August 2022, DCG stepped in and assumed some liabilities from Genesis related to the default of Three Arrows Capital. As stated in August, as these are now DCG’s liabilities, DCG is participating in the liquidation proceedings of Three Arrows Capital in the Creditors’ Committee and is pursuing all available remedies to recover the assets for the benefit of the creditors. Aside from Genesis Global Capital’s intercompany loans due May 2023 and the long-term IOU, DCG’s only debt is a $350 million line of credit from a small group of lenders led by Eldridge.
Stepping back, let me be crystal clear: DCG will continue to be a leading builder in the industry, and we are committed to our long-term mission to accelerate the development of a better financial system. We have weathered previous crypto winters and while this one may feel harsher, collectively we will come out stronger. DCG has raised just $25 million in primary capital and we’re gearing up to deliver $800 million in revenue this year.
I bought my first bitcoin ten years ago in 2012 and decided I would be committed to this industry for the long term. In 2013, we founded the first BTC trading company – Genesis – and the first BTC fund, which evolved into Grayscale, now the world’s largest digital currency asset manager. Foundry operates the largest bitcoin mining pool in the world and is building the decentralized infrastructure of tomorrow. CoinDesk is the industry’s leading media, data and events company and has done a phenomenal job covering this crypto winter. Luno is one of the most popular crypto wallets in the world and is an industry leader in emerging markets. TradeBlock is building a seamless institutional trading platform, and as a new subsidiary, HQ is building a life and wealth management platform for digital asset entrepreneurs. Each of these branches is a standalone business that is independently run and operating as usual. Finally, with a portfolio of over 200 companies and funds, we’re often the first check for the best founders in the industry.
We appreciate your words of encouragement and support, along with your investment offerings in DCG. We’ll let you know if we decide to go into a funding round.
Despite challenging industry conditions, I am more excited than ever about the potential of cryptocurrencies and blockchain technology in the coming decades, and DCG is determined to stay at the forefront.
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