Crypto winter is coming for Digital Currency Group’s Genesis

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Illustration: Ada Amer/Axios

Barry Silbert has achieved the impossible: he has successfully invented a truly safe way to earn billions of dollars in crypto. And yet his company, Digital Currency Group, is currently at rock bottom, with a key unit on the brink of bankruptcy.

Why it matters: The crypto winter lays bare the extent to which ‘whales’ in space, including billionaires like Silbert, willingly took ridiculous risks, even as they showed up in public as sober entrepreneurs who would accept regulatory constraints.

The big picture: Silbert became dynamically wealthy by achieving two big things. The first was to make a huge bet on bitcoin very early on in 2013. The second was to create a box known as GBTC, which would only own bitcoin, and which would be listed on the over-the-counter markets. .

GBTC was one of the first ways for individual and institutional investors to own bitcoin without having to worry about being hacked or even having to withdraw money from their exchange brokerage accounts. It was also a license to print money for Silbert, who charged his company, Grayscale, a 2% management fee for overseeing the box. Those fees were $615 million in 2021 alone.

Between the lines: GBTC threw away so much money because other crypto players, including doomed 3 Arrows Capital (3AC), poured billions into its stock as it traded at a premium against the underlying bitcoin.

All that money ended up flooding the market with GBTC, which is currently trading at a 45% discount to bitcoin in the box. Grayscale is now in a legal battle with a hedge fund called Fir Tree, which complains that GBTC acts like a cockroach motel: Bitcoin can come in, but it can never get out. If Grayscale allowed investors to redeem GBTC shares for bitcoin, the stock price would rise, but Grayscale would lose almost all of its management fees.

Zoom out: Silbert looks like he’s gambled away the money from GBTC. Another of its subsidiaries, Genesis, has lent billions of dollars not only to 3AC but also to Alameda Research, the now bankrupt crypto trading vehicle alongside FTX. The Alameda loans, according to Reuters, were collateralized by FTX’s home currency, FTT.

Silbert’s Digital Currency Group has also taken stakes in an astonishing number of more than 200 other companies, according to the WSJ. DCG was valued at $10 billion in a late-2021 funding round led by SoftBank, but none of the $700 million raised went to shore up DCG’s balance sheet; it all went to employees selling stocks. Genesis banned customer withdrawals last month.

The Bottom Line: For most of us, investing in cryptocurrency is ridiculously risky. I like to think that if I bet massively on bitcoin in 2013, it would be enough for a lifetime in terms of generating outsized wealth.

For the biggest crypto players, however, there never seems to be a limit to what is enough. They keep taking bigger and bigger risks, some of which may be big enough to jeopardize everything they’ve built over a decade.

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