Selling ETH Trust at a “discounted price”, is the DCG crisis basically resolved?

Cryptocurrency group Digital Currency Group (DCG) has begun selling shares in several of its crypto funds at “discounted prices,” with a focus on the Grayscale Ethereum Trust (ETHE).

DCG has sold a quarter of its stake in ETHE since Jan. 24 at about $8 a share, at a market price of $16, raising about $22 million in several transactions, the Financial Times reported late Monday, citing filings.

ETHE was launched in 2017 and has about $5 billion in assets under management. The fund is currently trading at a negative premium of about 54% to its net asset value, according to YCharts.com .

DCG also sold small amounts of Grayscale’s Litecoin Trust, Bitcoin Cash Trust, Ethereum Classic Trust, and Digital Large Cap Fund, which together manage approximately $700 million in assets.

Grayscale's largest investment product is its Bitcoin Trust ( GBTC ), which launched in 2013 and has $14.5 billion in assets. Grayscale earned $303 million in management fees from GBTC in the first nine months of 2022, according to securities filings.

Spot market not affected

The prices of Bitcoin and Ethereum remained relatively stable. According to data from the BitTorrent terminal, Bitcoin rose 2.27% to more than $23,000 on Tuesday after a 38% rebound so far this year; Ethereum rose 4% to around $1,631, with a year-to-date increase of 36%.

John Haar, managing director of Swan Bitcoin and former Goldman Sachs veteran, commented that this shows that the negative impact of the DCG crisis has been digested by the market.

It is unclear whether DCG plans to or has sold its GBTC shares to increase liquidity. DCG purchased nearly $800 million worth of GBTC shares between March 2021 and June 2022, which gives the company an estimated 9.67% of GBTC's outstanding shares. If DCG needs to raise more cash, selling these shares would seem to be an option.

However, selling them could further deepen the current negative premium of 43.08%, making it less attractive to investors. In addition, it should be noted that DCG is not allowed by law to sell more than 1% of its issued shares per quarter unless it obtains separate approval from the SEC. At this rate, it will take DCG about 2.5 years to sell all of its GBTC shares.

A less likely option is for DCG to order Grayscale to liquidate GBTC. This would allow the parent company to receive the full value of its GBTC position, but at the cost of losing its Grayscale cash cow forever, and no one wants to see 632,000 BTC – about 3.3% of the current supply – become a selling pressure on the market. Ram Ahluwalia, CEO of Lumida Wealth, told the Financial Times: "DCG faces a trade-off: they can allow redemptions and realize liquidity at par, including their own holdings, but they'd better not do that because they make a lot of money from management fees, and closing the discount means giving up this cash cow."

Generally speaking, sales of ETHE and GBTC will not have a direct impact on the spot market, depending on to whom the Bitcoin and Ethereum Trust shares are sold and under what conditions - whether DCG allows redemptions to provide par liquidity.

DCG and Genesis reach agreement with creditors

Genesis filed for bankruptcy protection last month after being hit hard by last year's market turmoil. Genesis's Chapter 11 filing shows that it owes more than $3 billion to its top 50 creditors, including seven creditors who owe at least $100 million. After negotiations, the company reached an agreement in principle on a restructuring plan with Gemini and other creditors on Monday. Before Genesis' bankruptcy, Gemini Earn users lent Genesis more than $900 million. Now, Genesis will assume the amount.

As part of the agreement, DCG will exchange $1.1 billion of notes due in 2032 for convertible preferred stock. In addition, DCG will pay creditors a total of $500 million in new junior secured term loans in two tranches to refinance its existing 2023 term loan.

The agreement also involves the sale of Genesis’ lending division and its crypto trading arm, with all Genesis entities coming under the same holding company, Genesis Global Holdco.

If those funds aren’t enough to cover the losses of Gemini Earn creditors, Gemini will step in. The company has pledged up to an additional $100 million to help compensate Earn users.

One piece of information that remains undetermined is the value at which the preferred stock will convert into DCG equity. According to the text of the agreement, the new DCG plan will ensure that creditors will recover more than 80% of their funds, but this still depends on the convertible preferred stock notes, the liquidation price achieved, and the unknown costs associated with the bankruptcy process.

Bob Ras, co-founder of blockchain-powered network Sologenic , said in a tweet that the protocol is a "decent solution" and said its results would not be as devastating to the industry as earlier predicted. He said: "In fact, some people have been making absolutely terrible predictions for Genesis and its parent company DGC. Of course, there will most likely be more FTX - Terra -Three Arrows-style failures in the future, but today's news makes me think the worst may be over."

There is still a lot of work to be done on the new restructuring agreement, including due diligence on Genesis' finances and judicial approval of the plan.