Summary The Genesis bankruptcy filing and subsequent updates have restretched the Grayscale Bitcoin Trust's discount to NAV to 47%. Handling of the $1.1 billion DCG promissory note is point of contention with the Winklevoss twins, majority owners of the Gemini exchange, a major creditor of Genesis. Under the restructuring plan, DCG will exchange the $1.1 billion 2032 promissory note for newly issued convertible preferred stock. DCG will be allowed to refinance its May 2023 term loans through a new facility with a June 30th, 2024 maturity. The agreement buys DCG meaningful time before it is forced to sell a large portion of its own holdings in Grayscale's products, including GBTC. Despite heightened fear and doubts, the ongoing Genesis bankruptcy drama likely only marginally affects the pricing of large-cap digital assets going forward. Bitcoin ( BTC-USD ) and Ethereum ( ETH-USD ) even rebounded strongly to close the week of the bankruptcy filing. Interest rate sensitive names, including digital assets, had been meaningfully down that week even with the somewhat favorable PPI Release . However, rumblings out of the mid-January bankruptcy filing have largely restretched the discount to NAV on the Grayscale Bitcoin Trust ( BTC )" target="_blank">GBTC ), which had been substantially shrinking at the beginning of the year prior to the filing (see lower right of graphic below). Data by YCharts So where from here? Short-term indicators do signal Bitcoin is still overbought. But as detailed below, the eventual Genesis bankruptcy settlement should not add renewed selling pressures to Bitcoin or be that meaningful to the closely intertwined Grayscale Bitcoin Trust, especially in the medium-term. More broadly, there is now a better balance of buyers and sellers among Bitcoin traders following the initial FTX (FTT-USD) driven selloff in November and the period of deleveraging directly after that exchange's collapse. The FTX collapse actually tightened the supply of coins on exchanges as holders moved to cold storage in this cycle's "not your keys, not your crypto" moment. Coinbase ( COIN ) saw Bitcoins held on Coinbase Pro fall from over 600k to under 500K from the FTX bankruptcy. This move from exchanges, especially exchanges with yield programs like Gemini's, precipitated the current issue at Genesis and caused the general liquidity and duration mismatch at the lending institutions. And this tightening of supply has been partially sustained in recent weeks as a few hundred million dollars in shorts were liquidated with the move from $16k to $23k. Genesis Bankruptcy And The Digital Currency Group Fear based selling and forced selling were two of the key components of the 2022 contraction phase of the crypto cycle. While the Genesis bankruptcy news will continue to inject uncertainty and heighten fears of further contagion, the playout of the bankruptcy itself may not add substantial forced selling supply to either the Bitcoin market or GBTC shares. Below we briefly rehash the Genesis bankruptcy history, look at the "First Day" information and last week's pact with creditors, as well as provide color on the possible links to crypto sector prices. Genesis is a subsidiary of the Digital Currency Group which connectedly is also the parent of Grayscale, who sponsors the prominent Grayscale Bitcoin Trust. One arm of Genesis is among of the largest OTC trading desks for the crypto sector, handling over $170 billion in trade volume in 2021. The other arm was a sizeable institutional lender with $130 billion in loan originations in 2021. It is this lending arm that is directly listed in the bankruptcy, see grey shading below. Note the graphic only outlines the Genesis companies, specifically Genesis Global Holdco and its sub-entities. In addition to Genesis and Grayscale, Digital Currency Group subsidiaries include the Foundry, one of the largest Bitcoin mining pools, and CoinDesk, a top crypto sector media company. Plus DCG is invested in 200 companies and funds including well regarded Circle; a breakout of the portfolio is here . Genesis Structure (restructuring.ra.kroll.com) In November the Genesis lending arm paused withdrawals. The Three Arrows bankruptcy in July had left a billion dollar shortfall on the balance sheet that was only fully surfaced following the FTX and Alameda collapse. While the Genesis lending arm did not then still have exposure to Alameda, the FTX news heightened fears and precipitated a "run on the banks" scenario at the crypto lenders, including Genesis. Note that the Genesis trading arm, which initially was not part of the bankruptcy filing, does have $175 million in exposure to FTX. So how bad is it? The First Day Hearing Presentation roughly outlined both the assets and the obligations: Genesis Global Holdco Assets (restructuring.ra.kroll.com) Genesis Global Holdco Obligations (restructuring.ra.kroll.com) So two things jump out. First, depending on how the collateral tranches are being accounted, Genesis' obligations outweigh their assets by a few hundred million dollars. And second, as noted just above, half of Genesis' assets are, interestingly, liabilities of parent DCG. The quality and present value of the $1.1 billion DCG promissory note has been a point of contention with Cameron and Tyler Winklevoss, the majority owners of the Gemini exchange, a major creditor of Genesis. Note customers in Gemini's yield program have claims of about $780 million against Genesis. The Winklevoss twins' major concern is their contention that the DCG promissory note was represented to them as a current asset, even though it had a 2032 maturity. Though there are these legitimate questions about the promissory note, it is important to recall that this debt was created when DCG assumed the liabilities Three Arrows owed to Genesis. So in a prudential light, DCG assuming these liabilities has strengthened the recovery Genesis' creditors will receive. And while DCG is now on the creditors' committee of the Three Arrows liquidation proceedings, it seems unlikely they will recoup a meaningful percentage of the loans originally provided to Three Arrows by Genesis. Genesis Agreement With Creditors And DCG On February 6th Genesis announced an agreement in principle with DCG and a large group of creditors. The main upshot being DCG will exchange its $1.1 billion 2032 promissory note for newly issued convertible preferred stock. Details of the preferred stock plan can be found on pages 7-8 of the filed Restructuring Term Sheet . Additionally, DCG will be allowed to refinance its 2023 term loans through a new facility with a June 30th, 2024 maturity. Proposed New Second Lien Facility (assets.ctfassets.net) DCG is also providing its equity interest in the Genesis trading arm to the bankruptcy recovery, with plans to launch a sale process for this asset. For their part, Gemini agreed to provide up to $100 million to affected customers in its yield program. Takeaway: Agreement Buys Critical Time The short-term dominant factor for both Bitcoin and GBTC remains monetary policy and interest rate expectations. Last week I had a piece covering this topic titled The February Fed And 6 More Weeks Of Crypto Winter . The general idea is that we won't see a real pivot in Fed policy until there is sustained downward movement in the key, core services inflation metric. And Tuesday's CPI is just further indication that interest rate sensitive tech stocks and the crypto sector will be somewhat negatively influenced by the growing narrative of substantially higher rates for much longer than previously expected. For this reason I am a "hold" on large adds to most Bitcoin names, including the miners, with the near-term pricing above $21k. But GBTC is a different story. The Genesis bankruptcy drama has restretched the Trust's discount to NAV to 47%. However, the fears driving this divergence appear overblown. Grayscale is not directly touched in the Genesis restructuring agreement and fears DSG would somehow be forced to unwind any of the Grayscale products, thereby spiking coin supplies, now seem remote. If implemented, the agreement also buys DCG time before it is forced to sell a large portion of its own holdings in the Grayscale products at a discount. DCG along with its other subsidiaries are reportedly holding a billion dollars of the Bitcoin Trust. The refinancing of the May 2023 loans through June 2024 greatly reduces the need for immediate liquidity. It also allows time for the sale of other non-coin assets such as CoinDesk. The Financial Times has reported that DCG recently sold a portion of its Grayscale Ethereum Trust ( ETHE ) holdings. But note, at $22 million dollars this is a relatively small percentage of their entire Grayscale holdings and their other sales were also concentrated in altcoin holdings, rather than Bitcoin. Further, time is critical as Grayscale is litigating against the SEC over the ability to convert their Bitcoin Trust to an ETF. Converting to an ETF would provide a mechanism through redemptions to reverse the discount to NAV. Oral arguments are set for March 7th and a ruling is expected in the second quarter. This litigation is just the first bite at the reversing the discount to NAV apple, but neutral legal pundits are somewhat surprisingly favoring Grayscale's argument in the lawsuit. Put simply, Grayscale's main contention is that the SEC acted arbitrarily in treating Grayscale's ETF conversion proposal differently than "similarly situated" Bitcoin futures ETFs. If the Exchange's surveillance-sharing agreement with the CME is sufficient to detect and deter fraudulent or manipulative activity in spot bitcoin markets, then spot bitcoin ETPs and bitcoin futures ETPs are equally protected from such activity. Grayscale v. SEC, Brief of Petitioner , 10/11/22, p. 32 In any case, the coming year should bring increased clarity of how Grayscale plans to implement a mechanism that would naturally reverse the discount to NAV on its Bitcoin Trust. As importantly, fears over Grayscale's general relationship to the Genesis bankruptcy, along with concerns DCG will be a large forced seller of GBTC shares as part of the bankruptcy restructuring, likely prove overblown. The agreement even closely aligns the creditors with the longer-term success of DCG and Grayscale. Because of its current 47% discount to NAV, I am reaffirming my "buy" rating upgrade from December on GBTC for those with an adequately long investment horizon. Risks remain elevated, but compensation though the discount appears overlarge. My new marketplace service is coming soon. Complete Crypto Analytics is launching in the near future and will provide model allocations for Bitcoin and Bitcoin adjacent names such as GBTC and the miners. Please keep reading my articles here for updates so you can reserve your spot as a Legacy Discount Member. Thank you for following my work.
