The question of whether or not Genesis Trading and Digital Currency Group (DCG) will go bankrupt is currently hanging 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 Grayscale Bitcoin Trust (GBTC).
But how likely is that to happen? To answer this, it is extremely important to understand what the three companies are, how they are related, and what obligations they have to each other. In addition, let’s take a look at the rumors that have been circulating in recent days and try to determine their truth.
Why Today Could Be Bitcoin’s D-Day?
DCG is one of the most important companies in the crypto industry and is the parent company of many well-known crypto firms, including Genesis and Grayscale.
Genesis is the only full-service prime broker in the cryptocurrency space and has been a gem in DCG’s portfolio. The company plays an important role in providing access and managing risks for large institutions.
However, after the collapse of Three Arrows Capital (3AC), he was already bankrupt and was rescued by DCG. The parent company is now a $1.2 billion creditor of 3AC.
Genesis announced late last week that it would end payments for its Genesis Earn program. As a result, it became clear that the company will need $1 billion in cash by today, Monday.
If Genesis can’t raise that amount from outside backers, things could look bad for DCG, and by extension Grayscale, according to rumors. Grayscale Bitcoin Trust currently holds 634,000 BTC that can be liquidated, creating massive selling pressure in the Bitcoin market.
One of the main sources of the current rumor is Andrew Parish, co-founder of ArchPublic. He claims there are “zero interested parties” for Genesis.
Absolutely zero offers for Genesis and DCG growth.
**Genesis creditors prepare for ‘imminent’ bankruptcy filing.
— Andrew (@AP_ArchPublic) November 20, 2022
However, how legitimate this source is is being questioned in the cryptocurrency community. Analyst Dylan LeClair expressed his doubts and advised these guys to take the sources with a grain of salt.
I have no idea if this guy is just making something up or not, but nothing would surprise me at this point.
Take these guys’ sources with a grain of salt, but… Where there’s smoke, there’s often fire.
Leverage kills – stable guys pic.twitter.com/B0oDJe78jh
— Dylan LeClair 🟠 (@DylanLeClair_) November 20, 2022
Assuming Genesis is indeed unable to raise capital, DCG may be forced to sell its equity and part of its portfolio. Adam Cochran, a partner at VC firm Cinneamhain Ventures, examines DCG’s assets to assess whether it can plug the $1 billion hole on its own.
DCG may attempt to sell its portfolio companies, including Luno, Foundry and Coindesk, as well as a significant portfolio of ventures. However, Cochran believes $1 billion is too optimistic, and “as a VC, I don’t have much to offer with a secondary,” he said.
So I think we’re looking at something like that.
On the surface, these are ballpark numbers, but it will give us an idea of what their venture portfolio might look like. pic.twitter.com/loH4mMiznG
— Adam Cochran (adamscochran.eth) (@adamscochran) November 19, 2022
Cochran went on to explain that Grayscale, Genesis, and Luno—in that order—could be DCG’s highest priorities. So to get to $1 billion, according to Cochran, they’ll have to sell some of the equity, all of their businesses, all of their liquid assets, and Luno/Coindesk/Foundry (if they’re worth anything).
Ultimately, DCG will have to throw everything aside to save the golden goose. Only if that fails will liquidation of the Grayscale Bitcoin Trust be on the table.
I think if we get another word this week that they’re closing a round, that means a lot of these items will sell. If they can’t get the raise in time, then they’ll have to look at spinning off Grayscale itself.
But even that may not be easy. Admittedly, Grayscale has already de-trusted XRP in the past. But this was against the backdrop of the US Securities and Exchange Commission’s lawsuit against Ripple Labs.
QCP Capital noted in a recent report that “those expecting GBTC to allow a one-time buyback for Genesis to meet its liquidity needs are misguided, as this would have to be done with SEC approval.” Given the SEC’s opposition to GBTC this year, QCP Capital doesn’t expect that to happen anytime soon.
Ram Ahluwalia, CEO of Lumida Wealth Management, meanwhile, is evaluated that “The right step to creation is a purchase.” Potential buyers could include GS, ICE or a consortium of investment banks. Ahluwalia said:
It won’t be easy – headline risk, regulatory scrutiny, asset quality questions, risk-averse climate, etc. (MS, Merrill, CS, Deutsche and Jefferies would not for various reasons).
If there is no buyer, DCG will have to plug the hole, which Ahluwalia believes it will not do because the business is not profitable. “This amounts to an organized bankruptcy of the Genesis credit subsidiary,” he said.
At press time, Bitcoin investors appeared to be in a very relaxed and risk-averse mode. The price of Bitcoin fell to $16,000, nearing a bear market of $15,675.