THE COLLAPSE OF CRYPTO BEHEMOTH DCG
DCG, or "digital currency group," is a venture capital company that focuses on the crypto market.
DCG, or "digital currency group," is a venture capital company that focuses on the crypto market. It was founded in 2015 by Barry Silbert, who was previously the CEO of Second Market Inc. Currently; DCG has five subsidiaries, which are Grayscale, Genesis Trading, Coindesk, Foundry, and Luno. Let’s see about each one in detail to know how DCG became the crypto behemoth.
SUBSIDIARIES OF DCG
GRAYSCALE: Grayscale was founded in 2013 by launching a Bitcoin trust. It became a DCG subsidiary in 2015. The same year, GBTC, or Grayscale Bitcoin Trust, started trading on the OTC market. It gained traction because back then it was the only way for the big players or institutions to get into the crypto. It charges a 2% management fee, which is 20 times more than the S&P 500 index fund. The reason people were willing to pay this much to GBTC was primarily because Bitcoin was yielding a compound annual return of 200% and there was no way for the institutions to get it apart from GBTC. Later on, Grayscale started offering other crypto coins, including Ethereum, Solana, Bitcoin Cash, and Litecoin.
HOW GBTC WORKS?
Grayscale collects fiat currency, primarily dollars, from institutions and then uses them to buy Bitcoin. Then it issues shares of GBTC to give them to the institutions. Any new shares issued have a minimum lockup period of 6 months, and only after that can investors get their shares. For every Bitcoin Grayscale buys, it issues 1000 GBTC shares, which can be traded on the stock market. When the demand for GBTC is higher than that of Bitcoin, GBTC trades at a premium, which was the case until February 2021 because there were no other viable instruments for institutions to get into Bitcoin. When the demand for GBTC is lower than that of Bitcoin, it trades at a discount, which is now the case because a lot of alternative instruments are available and they charge much lower fees than Grayscale. Also in Canada, there are three Bitcoin ETFs available, which further lowered the demand for GBTC.
Genesis Trading: It is a crypto trading desk for institutions that started in 2013. It provides spot trading, derivative trading, and loans for institutions. During the 2021 bull market, about $116.5 billion in spot trading, $53.8 billion in derivative trading, and $130.6 billion in lending and borrowing was happening on Genesis.
CoinDesk: It is a news site specializing in Bitcoin and cryptocurrencies. It was founded in 2013 and acquired by DCG in 2016. It is known for providing unbiased news, and last year it broke the FTX balance sheet news that led to the bank run on the FTX exchange.
Foundry: It was created in 2019 to meet the institutional demand for better capital access, efficiency, and transparency in the digital currency mining and staking industry.
Luno: It is a cryptocurrency exchange founded in 2013. It was acquired by DCG in 2020. Currently, it has 9 million customers.
During the bull market, everything was going great for DCG, as its subsidiaries were making a lot of cash. During the peak of the bull market, Grayscale's assets under management, or AUM, were worth $50 billion, and the company was earning $1 billion per year just from the management fees. That’s the reason DCG was able to raise a lot of cash from the market, and DCG's valuation reached $10 billion in November 2021. Its other subsidiaries, Genesis, CoinDesk, Foundry, and Luno, were also making money as people were eager to learn about and invest in crypto. At one point DCG subsidiary Grayscale became the 2nd biggest commodity fund in the world.
THE FALL OF DCG
After COVID hit in 2020, central banks around the world started printing trillions of dollars, which ignited people's interest in crypto. Institutions got interested in crypto after Michael Saylor announced that Microstrategy was buying Bitcoin for its balance sheet, and then Tesla announced it had purchased $1.5 billion of Bitcoin, which made people euphoric about Bitcoin and crypto.
In 2020, a lot of lending and borrowing companies came into the limelight, primarily BlockFi and Celsius. They were providing (6-8)% yield on Bitcoin and other cryptos, and this made them very popular as there was no such way to generate yield on Bitcoin. This became so popular that even some of the crypto OGs started advertising these platforms. No one was asking about the source of the yield. But very soon their business model was clear to the public. These platforms were giving dollars to Grayscale, which was using those dollars to buy Bitcoin and then issue shares.
At that time GBTC was trading on a premium and that’s why these centralized lending and borrowing firms were confident that they will be able to pocket huge profits when GBTC shares will unlock after 6 months. But the problem started when the GBTC premium turned into a discount, and then these centralized firms started to experience some heavy losses. This was not the only thing that was happening.
Three Arrows Capital, which was a VC firm, was also using customer money to buy GBTC shares. At one point of time, 3AC and BlockFi were two of the top holders of GBTC. But this was only half the story. When GBTC premium turned into discount 3AC and BlockFi started using GBTC as collateral to take a loan against it. They were using Genesis trading which is another subsidiary of DCG to take the loan. With that money, 3AC started investing in altcoins, and their founders even bought yatch for them. While in the case of BlockFi they werebasically running a ponzi scheme by taking money from new customers to pay out the old one.
In the meantime, the discount on GBTC widened even more as the crypto market started to crash in late 2021. DCG came to the rescue by buying a truckload of GBTC to help recover it, but it didn’t help. The market crashed even more, as did the collateral value of 3AC and BlockFi.
Then, in February 2022, UST founder Do Kwon announced that they would be buying Bitcoin to back their UST. They raised a lot of money from investors, and 3AC was one of them.
3AC used its GBTC collateral to take a loan and then they gave that money to Do kwon. This seemed like a good trade as Luna made an ATH amid crypto winter. In the first week of May 2022 just two days before UST collapse, UST performed an OTC transaction with Genesis trading by swapping $1.5 billion UST for Bitcoin. Just after two days UST started to depeg as some big institutions dumped a huge amount of UST which broke its peg. People started minting Luna to save UST but it didn’t help. UST also sold their whole Bitcoin reserve to peg the UST but UST kept going down.
This deteriorated the whole crypto market and then the Luna death spiral began. Luna almost went to zero and price of Bitcoin dropped by almost 25% in just two days which caused cascading liquidations. A lot of big players including Celsius and BlockFi were using their Bitcoin as collateral and their position got liquidated as they had no more collateral to provide.
Bitcoin dropped below $25k and then 3AC went bankrupt as they lost all their money in Luna and their collateral value also went down because Bitcoin went down.
In the meantime Genesis also suffered a huge loss as its $1.5 billion of UST which it took from Luna foundation was worthless. Then things got stable for sometime as FTX started buying distressed crypto companies namely BlockFi and Voyager. Then in November 2021 Coindesk published an article on the balance sheet of FTX and it showed that most of the FTX assets are in their own exchange token and some highly illiquid tokens.
Then CZ announced the sale of FTT and that caused bankrun on FTX and alameda went bankrupt. Just few days after FTX bankruptcy Genesis Trading halted all the withdrawals which send the fear into the market that it is insolvent. Later on it was found that Genesis also gave loans to Alameda by using their token FTT as collateral and as FTX went down the value of FTT dropped by 98% which made that collateral worthless.
Apart from that DCG which is the parent company of Genesis also took $1.675 billion of loans from it to buy GBTC shares as the discount of GBTC went below 30%. DCG used GBTC as collateral to take loans from Genesis to buy GBTC. If you think inception was hard to understand now you have DCG finance. Now the discount of GBTC is at 45% and it is getting worse with every day.
A lot of people are expecting that the only way DCG can survive is by selling the grayscale and if that happens it will be a death blow for crypto. Grayscale holds 650,000 Bitcoin which is about
3% of the total supply. If this amount will hit the market then pack your bags and forgot about crypto for next few years.
DCG was a blessing for crypto as its subsidiaries helped onboarded a lot of big players in crypto but during the bull market it got greedy and that led to its demise. DCG still have some ways to survive but they are quite complex. If DCG will survive from here it will be a good vote of confidence for big players who want to get it crypto.