- The GBTC trading scheme was profitable for Grayscale and Genesis, but it raised concerns about conflicts of interest.
- GBTC’s premium dropped and 3AC and others were forced to explore other high-risk ventures, which led to their downfall.
- Genesis’s bankruptcy filing revealed that the promissory note issued by DCG was worth less than its stated value.
In 2022, a significant controversy hit the crypto world, raising questions of deception that surfaced on social media. Vijay Boyapati, a respected figure in the crypto community, used Twitter to shed light on a complex scheme that might have misled investors and shaken the core of trust within the cryptocurrency market.
1/ There was a much more important fraud than SBF’s embezzlement that took place in 2022. It was a fraud (allegedly) perpetrated by one of the oldest companies in the space, @DCGco and its CEO, @BarrySilbert.
Time for a thread 👇
— Vijay Boyapati (@real_vijay) November 6, 2023
We know you’re eager to know more and more about this. We’ve broken the details down – dive in!
The Birth of Grayscale’s Bitcoin Trust
In 2013, Barry Silbert set the stage for Grayscale’s Bitcoin Trust (GBTC), marking a pivotal moment in the crypto landscape. It offered investors a new way to access Bitcoin through their brokerage accounts, connecting traditional and digital investments. For years, GBTC stood as the main gateway for equity market funds to enter the world of Bitcoin.
During its early years, GBTC’s unique structure as a trust caused it to trade above its net asset value (NAV). Investors were willing to pay a premium to enter the booming Bitcoin market through a familiar investment framework.
A Trading Opportunity That’ll Make History!
Grayscale took advantage of a special trading opportunity, letting investors contribute Bitcoin to the trust and, after a six-month lock-up period, obtain GBTC shares. These shares often traded at a premium compared to the original Bitcoin deposit. This strategy proved profitable and relatively low-risk, as long as GBTC shares maintained their premium over the actual Bitcoin value.
Genesis Global Trading played a crucial role in this trading strategy, serving as a primary source for borrowed Bitcoin. Major players, such as the Three Arrows Capital (3AC) hedge fund and the lending platform BlockFi, actively participated in this trading method, with Genesis providing the necessary funds. As a key part of the DCG empire, Genesis promised returns to Bitcoin holders while lending out the assets for trading.
But Wait… It Wasn’t All Smooth Sailing!
The intricate relationship between DCG, Grayscale, and Genesis gave rise to concerns about conflicts of interest. With GBTC shares locked within the trust, significant management fees flowed back to DCG, creating a strong incentive to continue the trading strategy. This situation raised questions about the independence of the companies under DCG.
Things changed significantly when GBTC’s premium dropped into negative territory in early 2021. This marked the beginning of the end for the GBTC trading strategy, forcing participants like 3AC to explore other high-risk ventures, including the TerraUSD carry trade. Meanwhile, Genesis continued its lending practices without interruption until 3AC’s default and the resulting market consequences revealed significant shortcomings in Genesis’s risk management practices.
The Aftermath
Following these events, Genesis found itself dealing with a substantial deficit of $1.2 billion. Instead of declaring bankruptcy, DCG took a unique approach and issued a promissory note to Genesis. This move aimed to restore confidence and prevent a liquidity crisis. However, later revelations suggested that the note’s actual value was considerably lower than its stated worth during Genesis’s bankruptcy filings.
Read More: Gemini, Genesis, and DCG Accused of $1 Billion Investor Fraud
It’s High Time for Transparency and Clarity!
This situation has sparked important questions about corporate governance and financial transparency in the ever-evolving cryptocurrency sector. Investors and regulators have become more watchful, demanding clearer oversight and stricter controls to prevent the emergence of such complex issues in the future.
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Qadir AK
Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.
