Bernstein Says Saving Grayscale Will Come at a Cost for Digital Currency Group

A feasible deal could involve a large minority partner or a buyout-like structure led by more strategic partners, Bernstein said.

AccessTimeIconDec 9, 2022 at 12:26 p.m. UTC
Updated May 9, 2023 at 4:04 a.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global event for everything crypto, blockchain and Web3.Register Now

Genesis’ extended withdrawal freeze – the lender has told its creditors it will take weeks rather than days to find a solution – continues to weigh on crypto markets, Bernstein said in a research report Thursday.

Parent company Digital Currency Group (DCG) owes Genesis about $1.7 billion. Bernstein sees three potential approaches for DCG: It could raise capital, sell non-strategic assets and save digital currency asset manager Grayscale or dissolve the Grayscale Bitcoin Trust (GBTC).

  • Key Events You Shouldn't Miss at Consensus 2024
    02:13
    Key Events You Shouldn't Miss at Consensus 2024
  • What to Expect From Consensus 2024
    11:19
    What to Expect From Consensus 2024
  • Will Solana and Altcoins Dominate the Market Next?
    13:29
    Will Solana and Altcoins Dominate the Market Next?
  • What's Next for FIT21?
    07:15
    What's Next for FIT21?
  • The “nuclear option,” and the least preferred choice for DCG, would be a dissolution of GBTC, the report said. DCG could apply for Reg M relief and instead of bitcoin (BTC) being sold in the open market upon dissolution, it could be exchanged for GBTC shares. That would leave holders of GBTC with bitcoin instead, causing the least market impact. It's unclear, however, if GBTC holders want to own the bitcoin itself as many bought the fund to avoid the hassles of cryptocurrency custody, the report added.

    Raising capital may prove difficult as valuations have dropped significantly in the private market since DCG’s last fundraising in November 2021, the note said. And with $2 billion of loans, the company’s balance sheet position is much worse. Therefore, a potential DCG deal structure would be a “comprehensive strategic financing” using a combination of debt to fund the loans, and fresh equity, the note added.

    Given the size of loans and illiquid assets, it is likely that the state of the balance sheet would weigh on the residual equity value, Bernstein said. This suggests that any deal would require a more strategic partner to be involved.

    “The feasible deal might be somewhere between a large minority partner or a buyout-like structure into DCG, led by more strategic partners, possibly financial institutions looking to buy entry into the industry,” analysts Gautam Chhugani and Manas Agrawal wrote.

    As Grayscale is the “crown jewel” and largest revenue generator in the group, the founders could decide to sell non-core assets including CoinDesk, Luno, Foundry or other venture assets, the note said, but it is not clear if this would bridge the balance sheet gap or happen quickly enough.

    The best option would be for DCG to work toward a comprehensive, strategic financing of the group, and any deal may involve founder Barry Silbert “giving up a large part of the pie,” the note added.

    Disclosure

    Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

    CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

    Author placeholder image

    Will Canny is CoinDesk's finance reporter.


    Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.