Digital Currency Group Reveals $2 Billion Debt in Investor Letter

Digital Currency Group (DCG) has published a letter to investors clarifying its financial standing while also showing the web of intercompany loans between it and its subsidiary Genesis Global Capital.

The crypto conglomerate disclosed that it currently has about $2 billion in debt, most of which are intercompany loans.

The loans are $575 million due in 2023 and another $1.1 billion promissory note due in 2032 to Genesis. The company also got a credit facility worth $350 million from a group led by Eldridge. 

Diving deeper into the state of things at DCG, CEO of Lumida Wealth Ram Ahluwalia explained what the investors’ letter revealed about DCG’s financials.

1/ DCG published a letter to investors. It clarifies several misconceptions. It also raises new questions around the Promissory Note.

I have pored over this and the Grayscale 10-Q to connect some dots. We’ll cover what happened and what we learned.

Let’s break it down… 🧵 pic.twitter.com/xeVmfHzlPq

— Ram Ahluwalia, crypto CFA (@ramahluwalia) November 25, 2022

DCG Likely Used GBTC as Collateral

Ahluwalia said DCG likely used its Grayscale Bitcoin Trust (GBTC) holdings as collateral to get the first loan from Genesis.

The company bought $778 million of GBTC shares between march 2021 and June 2022, hoping that the net asset value would close. It got funding from Genesis Lending for these purchases.

How 3AC’s Implosion Affected DCG, Genesis

But with the Three Arrows Capital (3AC) implosion in June 2022, DCG had to buy its GBTC. Unfortunately, 3AC also acquired GBTC shares, with Genesis Lending financing the deal. 

The NAV decline was part of what contributed to the 3AC implosion, and it also meant that the bankrupt hedge fund did not have collateral to cover its loan from Genesis. In fact, there was a $462 million shortfall.

6/ But DCG faced a double whammy. The value of GBTC dropped due to: i) a decline in the value of bitcoin, ii) and a widening of the NAV discount to 45%

3AC was once the largest holder of GBTC (38 MM shares). DCG assumed some or all of this GBTC when they margin called. pic.twitter.com/Cr6B3kyeTB

— Ram Ahluwalia, crypto CFA (@ramahluwalia) November 25, 2022

In order to prevent Genesis Lending from becoming insolvent, DCG stepped in. It also took control of some, if not all, of 3AC’s GBTC shares.

All these patterns suggest that DCG overleveraged on GBTC, and with the discount widening, it has been difficult for the company to deleverage. 

However, it has been doing that through earnings and could also sell its GBTC holdings. But the company will incur significant realized losses if it chooses to sell. The average price it paid for the shares is $24, which is currently trading at $9.

DCG Remains Strong

Ahluwalia noted that despite these challenges, DCG is strong enough to absorb the losses, which means it is unlikely to become bankrupt. But he pointed out that the company would have to raise fresh equity soon enough and hope that Bitcoin’s value does not drop further.

Meanwhile, the DCG situation further shows how interconnected the crypto industry is financially and the need for regulation to ensure more transparency.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

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