In an effort to collect money to repay the creditors of its bankrupt lending arm, the crypto behemoth Digital Currency Group has started to sell shares in many of its most coveted cryptocurrency funds at a significant discount.
According to US securities filings, SoftBank-backed DCG has begun to sell off its stakes in a number of investment vehicles managed by its subsidiary Grayscale.
The decision to sell the assets highlights DCG’s financial challenges as it works to raise money to maintain the defunct lending businesses operated by cryptocurrency broker Genesis while attempting to protect its most cash-generative divisions.
Connecticut-based DCG, established in 2015 by former banker Barry Silbert, is one of the biggest and most experienced investors in cryptocurrency projects and companies. SoftBank, Singapore’s government wealth fund GIC, and Alphabet’s venture arm CapitalG are among the investors who support it.
The asset management division of DCG, known as Grayscale, is crucial because it generates hundreds of millions of dollars in annual revenue from lucrative fees for managing sizable pools of bitcoin, ether, and other cryptocurrencies in funds that investors can invest in and purchase shares of through their brokerage accounts.
Even though the shares have dropped to significant discounts from the underlying value of the cryptocurrency they hold over the previous two years, DCG is selling ownership in one of Grayscale’s largest trusts.
It is looking to raise capital after the lending divisions of Genesis, its cryptocurrency broker, filed for bankruptcy in January, becoming the most significant enterprise to fail in the space since Sam Bankman-FTX Fried’s exchange rocked the market in digital assets.
The US group has been making efforts to pay back its creditors more than $3 billion, and it has been engaged in a public fight with the Winklevoss twins’ Gemini exchange on the debts. The business hired bankers from Lazard last month to assist in the sale of its trading news website CoinDesk in order to generate additional capital. The Financial Times earlier reported that it is also looking to sell off some of its $500 million venture portfolio.
After months of discussions, DCG and Genesis’ principal creditors, including Gemini, came to an arrangement on Monday. According to Cameron Winklevoss, This strategy is a crucial step towards a considerable recovery of assets.
Grayscale’s ethereum fund has been the subject of DCG’s most recent share sales, where the company sought to sell approximately a quarter of its stock to raise as much as $22mn in various trades since January 24, per the filings. Despite each share purporting to contain $16 worth of ether, the company is trading at around $8 per share.
Simply put, this is a part of their ongoing portfolio rebalancing, according to DCG.
For the fiscal year that ended in September, Grayscale made $209 million from the 2.5 percent management fee it received on the 3 million ether held in trust. According to documents given by The Washington Service, DCG last sold Ethereum Trust shares in 2021, when the investment vehicle traded almost exactly at its net asset value. The shares currently trade for only 50% of the value of the ethereum coin they represent.
About 3% of all bitcoin, worth $14.7 billion, are held in its flagship bitcoin trust, from which Grayscale receives a 2% fee. According to securities filings, it made $303 million in fees on the bitcoin trust in the first nine months of 2022.
According to the documents, DCG has also taken action to sell off smaller blocks of shares in Grayscale’s Litecoin Trust, Bitcoin Cash Trust, Ethereum Classic Trust, and Digital Large Cap Fund.
The group forbids investors from exchanging their shares for the coins held in the trusts, which would aid in bridging the significant differences in net asset values. The US Securities and Exchange Commission is being sued by Grayscale for preventing the development of a spot bitcoin ETF, which it claims would benefit investors and permit redemptions.
Ram Ahluwalia, CEO of Lumida Wealth, stated that DCG faces a trade-off: they could allow redemptions and offer liquidity at par value, including for their own holdings, but they’re better off not doing it because they make so much money from the management fees. Closing the discount would mean sacrificing this source of income.
The shares in Grayscale’s trusts traded at a significant premium to the value of the coins they held before cryptocurrency was widely exchanged through reliable exchanges, encouraging holders of bitcoin and ethereum to convert their coins for stakes in the Grayscale vehicles.
