Digital Currency Group’s risky Bitcoin Short could default on $575M debt
close up of bitcoin with bear figure shot in las vegas, nv. usa 6 September 2021
Digital Currency Group (DCG) is facing a significant financial challenge, owing about $575 million to Genesis in May. This debt, incurred through one in three loans used to short Bitcoin, has increased, creating a default risk scenario for DCG.
Despite the urgency of the situation, there is not enough time to get a new term sheet (TS). A term sheet is a non-binding agreement between parties that outlines the main terms and conditions of a potential financing or investment agreement.
It usually includes information such as the amount of funding, the valuation of the company and any rights or restrictions associated with the investment. In the case of DCG’s debt to Genesis, a new schedule will be necessary to renegotiate the existing loan terms and potentially avoid default.
DCG’s default risk increases as the May deadline approaches
Ram Ahluwalia, CEO of research firm PeerIQ, analyzed DCG’s finances and noted that the company is interested to get this agreement implemented. However, there has been no report of Digital Currency Group making an equity raise to plug the hole, and that seems unlikely, given the ongoing litigation.
1/ DCG owes ~$575MM to Genesis in May. (DCG is short bitcoin via one of the 3 loans, so amount owed is now higher)
There is now not enough time to get a new TS, definitive documents and indulgence in place. This creates a scenario for DCG default risk. 🧵
— Ram Ahluwalia, Higher for Longer Crypto CFA (@ramahluwalia) 26 April 2023
Furthermore, Digital Currency Group has not sold or financed any valuable assets, including Grayscale, Coindesk, Foundry or Luno. This suggests that the company is not planning to liquidate its assets to cover its debt, but is seeking alternative solutions to solve the problem.
Adding to the pressure, DCG tokens faced a significant decline during the Nov/Dec market, leading to concerns of forced selling or actual selling. While they have returned somewhat in sympathy with Bitcoin, they have lagged behind.
In addition, Digital Currency Group has already pledged $465 million of GBTC held for Gemini Earn in August 2022, with roughly half of this already sold. While the other half has increased in value, a significant gap of $300-400 million still needs to be filled.
Moreover, the loans issued to DCG are some of the best assets on Genesis’ balance sheet. This creates a tense situation, as higher BTC prices increase the amount owed to Genesis and the cash flow for Grayscale over time, thereby increasing Grayscale’s enterprise value.
Can Digital Currency Group and Genesis find common ground?
The ongoing Grayscale suit vs. The SEC adds another layer of complexity to the situation. While it is hoped that Grayscale’s suit will prevail, allowing investors to exit the trust, this will lead to Bitcoin redemptions, harming cash flow generation for DCG and reducing buyer interest.
The immediate focus is on May 11, when Genesis’ 4,500 bitcoin loan matures. This equates to $135 million, assuming BTC is at $30K. This deadline is critical for Digital Currency Group, as default on this loan could have significant implications for the company and the cryptocurrency market as a whole.
Overall, DCG’s financial challenges have created a default risk scenario, with concerns about whether there will be enough liquid assets to cover the outstanding debt of Genesis. The situation is complex, with multiple tensions at play, including the price of BTC and the ongoing grayscale vs. SEC.
Featured image from iStock, chart from TradingView.com
