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Digital Currency Group (DCG) has released a letter to investors clarifying its financial situation while showing the business-to-business lending network between it and its subsidiary Genesis Global Capital.
The crypto conglomerate revealed that it currently has around $2 billion in debt, most of which is business-to-business loans.
The loans are $575 million due in 2023 and another $1.1 billion promissory note due in 2032 to Genesis. The company also secured a credit facility worth $350 million from a group led by Eldridge.
Diving deeper into the state of affairs at DCG, CEO of Lumida Wealth Ram Ahluwalia Explain what the investor letter revealed about DCG’s finances.
DCG probably used GBTC as collateral
Ahluwalia said DCG likely used its Grayscale Bitcoin Trust (GBTC) holdings as collateral to secure Genesis’ first loan.
The company bought $778 million worth of GBTC shares between March 2021 and June 2022, hoping the net asset value would close. He secured financing from Genesis Lending for these purchases.
How the 3AC implosion affected DCG, Genesis
But with the implosion of Three Arrows Capital (3AC) in June 2022, DCG had to buy out its GBTC. Unfortunately, 3AC also acquired GBTC shares, with Genesis Lending financing the deal.
The drop in net asset value was part of what contributed to 3AC’s implosion, and it also meant the bankrupt hedge fund had no collateral to cover its loan from Genesis. In fact, there was a shortfall of $462 million.
In order to prevent Genesis Lending from becoming insolvent, DCG stepped in. He also took control of some, if not all, of 3AC’s GBTC shares.
All of these patterns suggest that DCG has overleveraged GBTC, and with the widening of the discount, it has been difficult for the company to deleverage.
However, he did so with his profits and could also sell his holdings in GBTC. But the company will incur significant realized losses if it chooses to sell. The average price he paid for the shares is $24, which is currently trading at $9.
Ahluwalia noted that despite these challenges, DCG is strong enough to absorb losses, meaning it is unlikely to go bankrupt. But he stressed that the company should raise new capital soon enough and hopes Bitcoin’s value will not drop further.
Meanwhile, the DCG situation further shows how financially interconnected the crypto industry is and the need for regulation to ensure more transparency.
