DCG sells shares in Grayscale crypto trusts in push to raise funds

by Arthur · February 10, 2023

Crypto conglomerate Digital Currency Group has begun selling shares in several of its most valued cryptocurrency funds at a deep discount, as it seeks to raise capital to repay creditors of its bankrupt lending arm.

SoftBank-backed DCG has begun offloading its holdings in several investment vehicles run by subsidiary Grayscale, according to US securities filings seen by the Financial Times.

The move to sell off the assets underscores the financial difficulties at DCG as it tries to raise funds to prop up collapsed lending units under cryptobroker Genesis, while trying to preserve its most cash-generating business.

Connecticut-based DCG, founded in 2015 by former banker Barry Silbert, is one of the largest and oldest investors in cryptocurrencies and businesses. It is backed by investors including SoftBank, Singapore’s sovereign wealth fund GIC and Alphabet’s venture arm CapitalG.

Grayscale, DCG’s asset management business, is a key asset: it earns hundreds of millions of dollars a year in lucrative fees for managing large pools of bitcoin, ether and other cryptocurrencies in funds that investors can buy shares of from their brokerage accounts.

DCG is selling stakes in one of Grayscale’s largest trusts, although over the past two years the shares have fallen to significant discounts to their underlying cryptocurrency value.

Line chart of GBTC discount to net asset value showing Grayscale Bitcoin Trust's declining value

It is seeking to raise money after the lending units of Genesis, its crypto broker, collapsed into bankruptcy in January, becoming the latest major crypto company to fail after the collapse of Sam Bankman-Fried’s FTX exchange rocked the digital asset industry.

The US group has been trying to repay more than $3 billion to its creditors and has been embroiled in a public dispute with the Winklevoss twins’ Gemini exchange over the debts. To raise additional funds, the group last month hired Lazard bankers to help sell its trading news site CoinDesk. It is also trying to offload some of its $500 million venture portfolio, the Financial Times previously reported.

On Monday, after months of negotiations, DCG reached an agreement with Genesis’ main creditors, including Gemini. “This plan is a critical step forward towards a significant recovery of assets,” Cameron Winklevoss said.

DCG’s recent share sales have focused on Grayscale’s ethereum fund, where the group has moved to sell about a quarter of its shares to raise as much as $22 million in multiple trades since Jan. 24, according to the filings. The company is selling for around $8 per share, despite each share’s claim of $16 in ether.

“This is simply part of our ongoing rebalancing of the portfolio,” DCG said.

Grayscale earns a management fee of 2.5 percent on 3 million ether in the trust, which equates to $209 million in the year to the end of September. DCG last sold shares of Ethereum Trust in 2021, when the vehicle was trading near net asset value, according to filings with The Washington Service. Today, the shares trade at half the value of the Ethereum coin they represent.

Line chart of ETHE Discount to Net Asset Value (%) showing Grayscale's Ethereum Trust halvings in value

The flagship bitcoin trust holds about 3 percent of all bitcoin, worth $14.7 billion, from which Grayscale earns a 2 percent fee. It earned $303 million in fees on the bitcoin trust in the first nine months of 2022, according to securities filings.

DCG has also moved to sell off smaller blocks of shares in Grayscale’s Litecoin Trust, Bitcoin Cash Trust, Ethereum Classic Trust and Digital Large Cap Fund, according to the filings.

The group does not allow investors to redeem their shares for the coins held in the trusts, which will help to close the significant values in net assets. Grayscale is suing the US Securities and Exchange Commission to block the creation of a spot bitcoin ETF, arguing that this would benefit investors and allow redemptions.

“DCG faces a trade-off: they can allow redemptions and enable liquidity at par, including for their own holdings, but they’re better off not doing that because they make so much money from the management fees,” said Ram Ahluwalia. CEO of Lumida Wealth. “Closing the rebate would mean giving up this cash cow.”

Before cryptocurrency could be easily traded through recognized exchanges, the shares of Grayscale’s trusts traded at a large premium to the value of the coins they held, encouraging bitcoin and ethereum holders to hand over their coins for shares in the Grayscale cars.