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03 Jan 2023
Gemini putting further pressure on DCG
Investors should pay attention to the ongoing financial distress related to Digital Currency Group (DCG) as the outcome could severely impact crypto markets.
In short, if DCG enters bankruptcy, the company could be forced to liquidate its assets. This could force DCG into selling its sizable positions in GBTC and unknown positions in ETHE and other Grayscale trusts. One natural, less liquidity-constrained route to this sale could be to initiate a Reg M, allowing traders to redeem shares at NAV, which would narrow the discounts – this is where the impact will be felt in crypto markets.
Currently, GBTC trade at a 45% discount to its NAV, while ETHE trades at a 59% discount to its NAV. GBTC holds 3.3% of the circulating BTC supply and 2.5% of the ETH supply. A Reg M would cause a massive arbitrage strategy of selling crypto spot versus buying Grayscale Trust shares. If this scenario plays out, crypto markets could face further downside. Over a longer time horizon, the market would finally get rid of the major burden that the Grayscale widow maker trade has generated, so it is shaping up to become a potential market bottom event. Since we last covered the DCG situation, more pressure has emerged. Most recently as Cameron Winklevoss published an open letter to DCG’s CEO Barry Silbert alleging that Barry has acted in bad faith stall tactics, with Genesis owing Gemini Earn users $900m. The open letter concluded with Cameron seeking from Barry to publicly commit to cooperating and solving the problem by January 8. Meanwhile, the letter did not disclose Gemini’s intended path if Barry does not respond, but the situation could develop into a coordination of an Involuntary petition for a DCG Chapter 11. Additionally, on December 28, investment advisor Valkyrie delivered a proposal to become the new sponsor and manager of GBTC while also announcing the launch of an opportunistic fund seeking to take advantage of the GBTC discounts.Grayscale’s Hotel California has also been a widow maker trade with ETHSource: TradingviewGBTC has gained most of the attention recently, which is natural for several reasons. Firstly, in light of Grayscale’s ongoing lawsuit with the SEC related to ETFs with the Final Brief deadline of February 3, before a ruling will occur. Second, due to the publicly known sizable hole left by the 3AC liquidation this summer. Third, due to the vast size of GBTC’s AUM (in USD) compared to the other trusts. Still, other trusts, such as ETHE, experienced similar inflow dynamics to GBTC in 2020-2021, likely also exaggerated by leverage. Since June 1, 2020, Grayscale’s Ethereum Trusts’ cumulative returns sits at -69% versus ETH’s 379%.