The Silver Lining 🌤 for Grayscale
There's so much doom and gloom news on crypto but there is a silver lining!
✨ Crypto Made Simple ✨: What Gives BTC Value?
For the purpose of my next couple of pieces, I want to reiterate the difference between “Bitcoin” and “BTC.”
When I say “Bitcoin,” I’m referring to the payments network itself, and when I say “BTC” I’m referring to the cryptocurrency that’s used on the Bitcoin network.
There are three main things that I believe drive value for BTC…
1. You have to use BTC to transact on the most decentralized and uncensorable payment network in the world.
The trend of deglobalization means that countries around the world are aiming to become more self-reliant. One of the most important things included in self-reliance is to have control over your own finances.
As I said in my last piece, the Bitcoin network provides an alternative payments system that can be used to avoid things like sanctions and potential asset freezes. As more entities use it, it’ll drive the value of the BTC currency as well.
Clearly, this demand is not immune to hype cycles and the price won’t go up in a straight line … but this will be a major driver of demand over the long term.
This is sort of like how foreign countries are required to use USD to buy oil. How long that trend continues is uncertain, but it’s currently one of the major drivers of value for USD.
Because BTC is relatively illiquid and has a small market cap compared to the size of global trade and fiat/gold reserves, I don’t expect that large countries will be fully reliant on Bitcoin/BTC anytime soon.
Relatively large countries, like Iran, have used it in small amounts for trade already, and that might continue. But for now, it makes much more sense for a majority of the adoption to be driven by smaller countries like El Salvador.
2. BTC is given as a reward to miners for strengthening the network, which is resource-intensive and costs money to generate.
Essentially, miners run very advanced computers to solve very complex algorithms.
In order for someone to hack the Bitcoin network, they would need to solve every algorithm that’s ever been solved by the miners.
So, every time one of those algorithms is solved, it makes the network harder to hack, thereby strengthening it.
There’s clearly massive value in protecting the Bitcoin network, and that value is denominated in BTC.
3. BTC is extremely divisible and portable.
The divisibility of BTC is something that often gets overlooked.
The smallest value of a BTC that can be transacted is one “Satoshi.”. A Satoshi (named after the creator of Bitcoin) is equal to just 0.00000001 BTC.
Since there’ll only ever be 21 million BTC in existence, this means that there are 2.1 quadrillion Satoshis that can be transacted.
A common misconception about BTC and crypto in general is that you need to buy/sell/send an entire “coin” at a time, but the divisibility makes it much more convenient and appealing to use.
It takes large amounts of time, space, and high costs to store large amounts of physical money and gold, which are the primary components of global reserve funds.
BTC solves this issue by being completely digital, so you can store billions of dollars in a single address on the Bitcoin blockchain.
The Fate of DCG, Genesis, & Grayscale
This week, I want to focus on the situation currently unfolding at Digital Currency Group (DCG) and how it pertains to the Grayscale trusts (GBTC, ETHE, etc.) and the broader crypto market.
For a quick update, watch the video below! 👇
First, I want to give a little bit of background.
DCG is a huge conglomerate within the crypto space. It owns Grayscale — which owns many crypto trusts, such as GBTC and ETHE — and it owns Genesis, which is one of the biggest institutional lending firms in crypto.
It also owns a bunch of other subsidiaries — including the world’s largest Bitcoin mining pool — and it’s invested in a ton of startups and projects within the crypto ecosystem:
To understand what’s going on, Genesis and Grayscale are the most relevant subsidiaries of DCG.
To say that Genesis has had a rough 2022 would be an extreme understatement…
Back in May/June, it was hanging on by a thread after the collapse of LUNA and the Three Arrows Capital (3AC) hedge fund, which went bankrupt largely because of LUNA’s demise.
At the end of Q1, Genesis had over $14.5 billion worth of outstanding loans.
It’s not clear how much of that was lent out to 3AC … but we do know it was a huge customer of Genesis’ taking out $2.36 billion worth of loans.
As of the end of Q3, Genesis’ total active loans had plummeted to just $2.8 billion.
Genesis: A Contributor to the LUNA Collapse? 🤯
What a lot of people overlooked, though, was the fact that Genesis was likely a contributor to the collapse of LUNA.
Back on May 5, the Luna Foundation Guard bought $1.5 billion worth of BTC from various institutions, with Genesis leading the way. It paid for that BTC with its own stablecoin, UST, which was pegged to the dollar.
A few days later, UST was sold heavily, lost its dollar peg, and collapsed to $0.75.
Just days after that, LUNA and UST were worth essentially nothing.
That panic was undoubtedly caused by the parties that took in the $1.5 billion in UST, who wanted to cash in and, instead, started a collapse in two of crypto’s largest assets.
So, Genesis managed to survive all of that (we’ll see how in a minute) only to presumably lose another $175 million that it was holding in FTX in early November.
DCG was quick to give it $140 million to try and stop the bleeding on November 11 — but by November 17, it was reported that Genesis needed an emergency loan of $1 billion.
A few days went by, and there were no takers. So, Genesis proceeded to suspend withdrawals — an ominous sign for many crypto companies this year.
On November 21, it reduced its ask from $1 billion to $500 million … but unsurprisingly, no one was willing to take that offer, either.
It Gets Worse 😔
If all that wasn’t enough, it turns out Genesis and DCG haven’t exactly been responsible with their money. This is where it gets ugly…
Remember the $2.8 billion in active loans that Genesis had at the end of Q3? Well, $575 million of that is to its parent company, DCG … and it’s due in May.
DCG also owes Genesis another $1.2 billion from the 3AC fallout. This isn’t actually a loan — it was just a transfer of liabilities (the official term is “promissory note”).
Basically, Genesis has a claim out for $1.2 billion of 3AC’s assets, and it’s uncertain how much it’ll actually receive.
In order to keep Genesis alive, DCG assumed responsibility of $1.2 billion of that credit.
So now, 3AC has to pay that $1.2 billion to DCG. And if it does — which is a big if — DCG has to pay it to Genesis.
So, Genesis has liabilities of $2.8 billion (all the people it owes). But what about its assets?
From what we know, they have the $1.2 billion promissory note from DCG — which isn’t actually money yet and may never be — and the $575 million loan outstanding to DCG that’s due in May.
This is where it gets even worse for Genesis.
In a letter to shareholders, DCG’s CEO, Barry Silbert, said that the $575 million that it borrowed from its own subsidiary was “used to fund investment opportunities and to repurchase DCG stock from non-employee shareholders.”
To me, it sounds like it blew most — if not all — of that money (that again, it borrowed from its own subsidiary) on share buybacks and investments in unnamed crypto projects or “opportunities.”
Seeing that everything publicly traded in crypto is way down, and private equity in crypto is extremely illiquid, I can’t imagine DCG still has much of that $575 million left.
And considering that Binance, which is heading up a $1 billion “recovery fund” for the crypto industry, turned Genesis down, it’s not looking great for them (or for DCG for that matter).
But … It Gets Better 😏
So, where does this leave Grayscale? This is where we finally have some good news!
Thankfully, it still seems to be OK, and I believe it’ll make it out of this mess one way or another.
Ultimately, the BTC that are underlying the GBTC shares are custodied by Coinbase, as are the ETH that back the ETHE shares and so on.
When it comes to regulators, Coinbase has been one of the most — or the only, for that matter — compliant crypto companies.
I have no reason not to believe all underlying assets are secure, which means there’s no apparent danger facing Grayscale.
Bear 🐻 Case Scenario
The worst case seems to be that Genesis — and possibly DCG — files for bankruptcy, and DCG reverts to selling its Grayscale business to pay creditors. This would also involve DCG selling its giant stake in GBTC.
As of September 30, DCG owned 9.67% of all GBTC shares — which, at the current price, adds up to almost $600 million.
It’s possible that it’s sold some shares since then, maybe to give Genesis that $140 cash injection, and could also explain some of the further collapse in GBTC’s premium.
However, if DCG does have to liquidate its GBTC holdings (just to clarify, I don’t mean liquidate the actual BTC that GBTC represents), it’ll likely create an even further premium.
If Grayscale survives — which I give an extremely good chance — the current steep discount, as well as any further discount driven by DCG liquidation, is an amazing buy.
It’s also possible that DCG selling its Grayscale business would be such a relief to the market that the GBTC liquidation wouldn’t drive the discount much further down.
Bull 🐂 Case Scenario
Another outcome that would minimize damage across DCG companies is if DCG comes up with the cash to pay back its $575 million loan to Genesis.
I have to imagine it has at least some cash on hand to do this with, and there’s still plenty of time to raise funds from other players in the industry.
On top of that, Grayscale is still making 2% fees on all assets that it holds. At current prices, that means it’s bringing in about $291 million per year from GBTC and ETHE fees, which could be supplemental to that $575 million.
DCG’s ability to pay that back would obviously also help Genesis, as it’s still currently looking for $500 million.
It’s unclear how much that would help Genesis avoid bankruptcy, but DCG staying alive is much more important to the industry than Genesis anyway.
If you want more crypto and stock updates — including stock picks for my options service and promising crypto picks — check out our Platinum Membership by clicking here!
#StrongHands 🙌 #BOP 🚀 Nation Update ️️️️️️️️️️️️❤️️
ATG stands for Against the Grain. ATG represents seeing the world for what is abundantly clear to see — an opportunity for incredible growth and the BRIGHT and PROSPEROUS future that lies ahead.
To aid you on your journey to financial freedom, we have five paid plans starting at $9.99 for you to consider. Just visit atgdigital.media to see which plan is the best fit for your journey!
Substack 🥞 subscribers: 2,116 (+17)
Join us, be #BOP 🚀, Be #StrongHands 🙌, #GoATG! ️❤️️
Disclaimer/Legal stuff written in plain English
What you read/watch/hear is OPINION, not financial/investment advice. Treat it no different than when you read/watch/hear your favorite author/YouTuber/podcaster. Despite our best efforts, we get things wrong and make mistakes. Investing is risky. There is no guarantee you will make money. Your investments may lose value. That’s RISK. We cannot give you personalized financial advice because we are NOT financial advisors. It’s on you to decide how much/when/what to buy/sell based on YOUR financial needs, plans, and risk preferences. It's your money and your responsibility.