DCG/Genesis/Grayscale

DCG/Genesis/Grayscale Situation

This will be a quick one as the situation is still murky.

Digital Currency Group, run by Barry Silbert, is the parent company of Genesis Trading, Grayscale, and Coindesk.

Genesis Trading: A full-service digital currency market maker that lost a lot of funds in the FTX collapse.

Grayscale: Creates tradable trusts that have the sole purpose of holding a given assets (GBTC holds BTC).

Coindesk: Crypto news site.

Digital Currency Group is down bad after Genesis Trading got hit by the FTX collapse.

Genesis owes a lot of money.

Luckily, DCG owns Grayscale, which they could potentially sell, or sell some assets from, to cover losses in Genesis.

Unluckily, Grayscale has its own problems.

Grayscale trusts hold crypto, and people can buy trust shares (such as GBTC) to get exposure to crypto on traditional markets. The problem is, legally, owners of the trust shares are not able to redeem trust shares for the actual underlying holdings.

This lack of liquidity means GBTC and the other trusts are trading at a significant discount to their NAV (net asset value):

Grayscale has attempted multiple times to convert the GBTC trust into a Bitcoin spot ETF which would fix this discount issue, but the SEC has continually rejected the applications.

If a Grayscale ETF were to be accepted by the SEC, the GBTC discount would likely rapidly close to 0. In order to isolate for and directly trade the GBTC discount, one could long GBTC, and short spot BTC.

Alternatively, Grayscale has recently brought up the option of a tender offer, where it would sell off a portion of the underlying assets to buy back shares from investors.

This would potentially put immense sell pressure on the crypto assets Grayscale owns:

The market believes these assets are at risk of being sold off to help cover the debts of Genesis Trading.

The play:

Assume the assets within the Grayscale trusts may be sold off in some form or fashion in order to help plug the hole for Genesis Trading. Enter short positions in ETC, ZEN, and ZEC and BTC. Consider hedging with longs in ETH. By hedging with an ETH long you are betting that these assets will under-perform against ETH.