Digital Currency Group will pay a price for saving Grayscale

Key points: 

• Parent company DCG owes Genesis about $1.7 billion.
• Three possible approaches for DCG: it could raise capital; sell non-strategic assets and rescue digital currency wealth manager Grayscale, or dissolve the Grayscale Bitcoin Trust (GBTC).
• DCG could apply for Reg M relief and instead of BTC being sold in the open market upon dissolution, it could be exchanged for GBTC shares.
• Since DCG last raised capital in November 2021, private market valuations have fallen significantly, so raising capital could prove difficult.
• A possible DCG deal structure would be a "broad strategic financing", using a combination of debt to fund loans and new equity.

Genesis’ extended payment freeze — which lenders have told creditors will take weeks rather than days to resolve — continues to weigh on crypto markets, Bernstein said in a research note on Thursday.

Parent company DCG owes Genesis about $1.7 billion. Bernstein sees three possible approaches for DCG: it could raise capital; sell non-strategic assets and rescue digital currency wealth manager Grayscale, or dissolve the Grayscale Bitcoin Trust (GBTC).

The DCG's "nuclear option" and the least popular option would be to dissolve the 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. This would leave GBTC holders with only Bitcoin, which would have a minimal market impact. However, the report added that it is unclear whether GBTC holders would want to own Bitcoin for themselves, as many bought into the fund to avoid the hassle of custody of the cryptocurrency.

Since DCG last raised capital in November 2021, private market valuations have fallen significantly, so raising capital could prove difficult, the release said. Add in the $2 billion in loans, and the company's balance sheet is in even worse shape. As such, the report added, a possible DCG deal structure would be a "broad strategic financing", using a combination of debt to fund loans and new equity.

Given the level of loans and illiquid assets, the balance sheet position could weigh on the value of the remaining equity, Bernstein said. This suggests that any deal will require the involvement of more strategic partners.

Analysts Gautam Chhugani and Manas Agrawal wrote: "A viable deal could lie between a large minority shareholder partnership or a buyout-like structure led by more strategic partners in DCG, possibly a financial institution looking to buy into the industry."

Since Grayscale is the group's "crown jewel" and largest revenue generator, the founders may decide to sell non-core assets such as CoinDesk, Luno, Foundry, or other venture assets, the release said, though it's not clear whether that would close the balance sheet gap or happen fast enough.

The best option is for DCG to try to provide comprehensive strategic funding for the group, with any deal likely to involve founder Barry Silbert "giving up a chunk of the pie", the note added.