Digital Currency Group (DCG) is a venture capital firm that invests and builds businesses in cryptocurrency and blockchain-related companies. It is founded in 2015 by Barry Silbert and is based in New York. DCG’s subsidiary companies include Genesis (a crypto-lending firm), Grayscale (a securities firm), and Coindesk (a crypto-news agency).
Genesis provides liquidity to institutional clients and professional traders by facilitating the trading of large blocks of cryptocurrencies such as Bitcoin, Ethereum, etc.
Grayscale is a digital asset management company that offers investment products for institutional and accredited investors. The company offers various investment products, such as digital currency investment products and ETFs, which can be purchased like shares on OTCQX. The share price reflects the price movements of bitcoin prices.
Grayscale investment products are backed by Bitcoin and other cryptocurrencies. This product was introduced to expose investors to cryptocurrencies without engaging in risk. Grayscale makes money by charging a small commission for stock trading and also charging an annual fee.
As of now, Grayscale is the second largest Bitcoin owner besides Satoshi Nakamoto, which stands at 638,480 BTC.
What happened to Genesis?
Following the FTX collapse in November 2022, Genesis officially said on its Twitter account that it had lost $175 million, however, it assured that it will not affect its market making activities. But within a week they stopped the withdrawals, causing widespread anxiety among investors.
The year 2022 had not been a good one for Genesis, as two companies (Three Arrows Capital and Babel Finance) that Genesis invested in failed miserably, resulting in the loss of millions of dollars for Genesis. This happened in June 2022. FTX crashed in November 2022 and Genesis was affected. Although parent company DCG provided a loan to Genesis to keep the company afloat, it was not enough.
Federal prosecutors are currently investigating the deals and transactions between DCG and Genesis. The Genesis spokesman assured that the company’s operations are carried out in accordance with federal laws and that the current financial crisis will be resolved soon.
What happened to Grayscale?
Grayscale Bitcoin Trust (GBTC) is a prominent investment product from Grayscale. GBTC allows investors to follow the movement of Bitcoin without actually owning or owning the bitcoin. GBTC is like a stock where investors can buy, sell and trade just like any other stock.
The amount of GBTC an investor owns is directly proportional to a certain fraction of bitcoin they could have owned. Investors will not have to take the risk of holding Bitcoin if they own GBTC. Grayscale assured clients that there is no risk and that it is a completely safe investment.
GBTC’s price may fluctuate and may trade at a premium or discount based on supply and demand for GBTC shares. GBTC can be sold at a lower price (discount price) if demand is low and can be sold at a higher price (premium price) if demand is high. The risk with GBTC is that when there is a downtrend in the market, GBTC will sell at a discounted price, resulting in a loss for the Grayscale company.
After the bull run in 2021, Bitcoin had a bear year in 2022. This also affected grayscale revenue generation. On top of that, there are massive withdrawals by investors at every exchange and cryptocurrency investment firm. The ugly truth is that DCG, Genesis and Grayscale were not ready for this and therefore stopped the withdrawals.
How could the SEC have helped Grayscale?
Grayscale has gone to great lengths to convert GBTC into ETFs in order to remove leverage and therefore remove premium and discount pricing. They have applied to the Securities and Exchange Commission (SEC) for this many times. But the SEC denied this stating that it could lead to Bitcoin Spot manipulation and fraudulent activities. The SEC was right in their view and Grayscale has sued the SEC over this, which will get a final verdict on February 3, 2022.
What is likely to happen in 2023?
There is a high probability that DCG could file for Chapter 11 bankruptcy. If that happens, they may need to liquidate their assets, but the company cannot simply sell off its digital assets as easily and could require more time. Grayscale’s assets could also be liquidated to recover the loan amount.
The Winklevoss brothers could sue Genesis for mismanaging their investors’ funds. Genesis is also on the verge of bankruptcy. It had laid off 30% of its employees by 2022.
The silver lining is that federal prosecutors are working in the best interest of affected investors and the general public. If there is one important thing you can learn from this prolonged crypto winter, it is: “Keep your coins in your own wallet, be the sole custodian of your coins!”
This post Is Digital Currency Group (DCG) a Sinking Ship? What to expect in 2023: another bankruptcy?
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