Barry Silbert, founder of crypto conglomerate Digital Currency Group, has joined a growing list of industry leaders in an effort to reassure investors in the wake of FTX’s sudden collapse.
In an address to shareholders on Tuesday, Silbert responded to all the buzz about the financial health of DCG’s subsidiaries, which include trading firm Genesis, Grayscale Investments and mining company Foundry.
After the quick shutdown of FTX two weeks ago, investors are worried that the crypto contagion will affect all corners of the industry. Lenders have stopped lending, withdrawals have become more difficult and unregulated, obscure tokens have fallen in value. Leading cryptocurrencies, bitcoin as well as etheralso continued their annual descent.
Silbert, an early bitcoin evangelist who founded DCG in 2015, said that despite the crypto winter, the company as a whole is on track to generate $800 million in revenue this year from just $25 million raised in core capital. from the moment of creation. Forbes estimates Silbert’s net worth at $2 billion.
“We have survived previous crypto winters,” Silbert wrote, adding that “while this one may seem harsher, collectively we will come out of it stronger.”
Coinbase, Binance, and Crypto.com have also gone to great lengths to allay customer concerns to avoid a run on FTX-style client deposits. Each of them expressed shock at FTX’s apparent deception of investors and clients and emphasized that clients’ assets are safe.
And all this with the knowledge that FTX and founder Sam Bankman-Fried had betrayed the trust of an industry that had already experienced a brutal year of losses. Bankman-Fried said his company’s assets were “in order” two days before he was in desperate need of a bailout due to a liquidity crunch.
As for DCG, investor confidence was hit hard last week when the Wall Street Journal reported that Genesis was trying to raise $1 billion from investors before ultimately suspending withdrawals. There were reports that Genesis would soon file for bankruptcy, which the company publicly denied.
Fear has spread to the Grayscale Bitcoin Trust, known for its ticker cylinder head, which allows investors to access Bitcoin through more traditional security. GBTC is currently trading at a 42% discount against Bitcoin, compared to around 30% discount two months ago.
Regarding Genesis’ lending business, Silbert said in a letter that the suspension of repayments and new loans on Nov. 16 was “an issue of liquidity and timing mismatch” in the loan book. These issues, he said, “did not affect” spot trading or custody of Genesis derivatives, which “continue to operate as usual.”
He acknowledged that Genesis has hired financial and legal advisers as the firm considers its options.
DCG’s debt is just over $2 billion. The company has loaned Genesis approximately $575 million at “current market interest rate” to be repaid in May 2023. It also absorbed $1.1 billion in debt that failed crypto hedge fund Three Arrows Capital owed to Genesis.
In connection with Three Arrows’ bankruptcy, DCG is “using all available legal remedies to recover assets on behalf of creditors,” Silbert wrote. DCG’s only other debt is a $350 million line of credit from “a small group of creditors led by Eldridge.”
Read Silbert’s full letter below:
There has been a lot of noise this past week and I want to get in touch directly to clarify the position of DCG.
Most of you are aware of the situation at Genesis, but to recap: Genesis Global Capital, Genesis’s lending business, temporarily suspended repurchases and issuance of new loans last Wednesday, November 16, after market turmoil triggered unprecedented withdrawal requests. This is the issue of liquidity and duration mismatch in the Genesis loan book. It is important to note that these issues do not affect spot trading or custody of Genesis derivatives, which continue to operate as normal. Genesis management and their board of directors have decided to hire financial and legal advisors, and the firm is exploring all possible options amid the fallout from FTX’s collapse.
In recent days, there has been talk of intercompany loans between Genesis Global Capital and DCG. For those who don’t know, in the normal course of business, DCG borrowed money from Genesis Global Capital in the same vein as hundreds of crypto investment firms. These loans have always been structured on market terms and valued at prevailing market interest rates. DCG currently has liabilities to Genesis Global Capital of approximately $575 million due in May 2023. These loans were used to fund investment opportunities and repurchase DCG shares from non-employee shareholders in secondary transactions previously covered in quarterly shareholder updates. To this day, I have never sold any of my DCG shares.
You may also think of a $1.1 billion bill due in June 2032. As we reported in our previous shareholder letter in August 2022, DCG stepped in and assumed certain obligations from Genesis related to the default of Three Arrows Capital. As announced in August, since these are now liabilities of DCG, DCG is participating in the liquidation of Three Arrows Capital before the Committee of Creditors and is using all available remedies to return the assets to the benefit of the creditors. Aside from Genesis Global Capital intercompany loans maturing in May 2023 and a long-term note, DCG’s only debt is a $350 million line of credit from a small group of lenders led by Eldridge.
Taking a step back, let me be clear: DCG will continue to be the leading builder of the industry, and we are committed to our long-term mission to accelerate the development of a better financial system. We have survived previous crypto winters, and while this one may seem harsher, collectively we will come out stronger. DCG has only raised $25 million in core capital and we are aiming for $800 million in revenue this year.
I bought my first bitcoin ten years ago in 2012 and made the decision that I would be in this industry for the long term. In 2013, we founded the first BTC trading firm, Genesis, and the first BTC fund, which evolved into Grayscale, the world’s largest digital currency asset manager. Foundry operates the world’s largest bitcoin mining pool and builds the decentralized infrastructure of tomorrow. CoinDesk is an industry leading media, data and events company and they have done a phenomenal job covering this crypto winter. Luno is one of the most popular cryptocurrency wallets in the world and an industry leader in emerging markets. TradeBlock is building a seamless institutional trading platform, and HQ Headquarters, as the newest subsidiary, is building a life and wealth management platform for digital asset entrepreneurs. Each of these subsidiaries is an independent business that is independently managed and operates as normal. Finally, with a portfolio of over 200 companies and funds, we are often the first check for the industry’s top founders.
We appreciate words of encouragement and support, as well as offers to invest in DCG. We will let you know if we decide to go ahead with a funding round.
Despite challenging industry conditions, I am more than ever excited about the potential of cryptocurrencies and blockchain technology in the coming decades, and DCG is determined to stay at the forefront.
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