Moralis Powered Dapps Part 3

Welcome back everybody. It’s been another exciting week in crypto and we’re pleased to bring you the next edition of The Blockchain Review. There are still questions on whether the contagion has finished or whether there are still some dominoes left to fall. This week it’s Genesis, Grayscale and their parent company Digital Currency Group in the spotlight with a complicated web of financial management/mismanagement. 

The instability and losses can again be traced back to the downfall of 3AC following the collapse of Luna and the algorithmic stablecoin UST. Genesis had lent money to the now bankrupt 3AC. 

There are also intercompany loans between Genesis and DCG. Then it appears when 3AC collapsed DCG took on Genesis’ other liabilities to shore it up. Then to top it off the FTX group collapsed and it emerged Genesis had lent them $175M.

Genesis is now seeking $1B of external capital to be able to continue its operations. DCG isn’t willing or able to bail out Genesis again and they appear ready to sacrifice the subsidiary. The web of subsidiary companies isn’t as complex as seen in the FTX Group and the surface concern is whether Genesis will be able to continue. But naturally everything else in the group is now also being questioned.

For example Grayscale has so far publicly refused to disclose their on-chain holdings and prove the GBTC trust is fully backed. Ergo, another blockchain project, have attempted their own on-chain analysis though and think they can confirm the rough 633k BTC is held at Coinbase Custody which appears to be good news. 

Last year the Grayscale GBTC trust had been trading at a premium to the spot price of BTC and 3AC were known to be arbitraging the differential. They’d been borrowing against their holdings and then repeating the cycle meaning the demand was somewhat artificial.

This year the GBTC price has collapsed, likely because capital has dried up and there are no large entities arbitraging the differential anymore. ‘Equivalent’ shares of the trust can now be bought for a 40% discount to the spot price of BTC. Recently DCG has more than doubled its GBTC holdings but speculation arises whether they used the money they borrowed from Genesis to do so.

If the SEC ever approves the Grayscale Trust as an Exchange Traded Fund, then shareholders will be able to convert their trust shares into ETF Bitcoin. But there still aren’t any spot BTC ETF’s approved in the US and they’re getting refused on the basis of a potentially manipulated market. Unfortunately the revelations of the last few months aren’t going to make the approval of an ETF any more likely. So whilst Grayscale is still a very profitable business with 2% fees collected each year, if DCG has liabilities way more than their assets or an inability to raise further capital they may be forced to consider selling or unwinding Grayscale. 

The unwinding of Grayscale would be the doomsday scenario and mean selling billions of dollars of BTC and ETH thus impacting the market even further. It’s not happening yet, but as the last few months have shown things can change quickly. 

Keep an eye on what’s unfolding and the tremendous amount of lessons on financial management/mismanagement which can be learnt. Whoever sticks around through all of this (FUD hopefully), will be putting themselves in a better position to be winners of the next cycle.

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