Dec 10, 2022 - Economy

How crypto billions evaporate

Illustration of an empty suit with smoke where the head would be. 

Illustration: Aïda Amer/Axios

Barry Silbert achieved the impossible: He successfully invented a genuinely safe way of earning billions of dollars in crypto. And yet his firm, Digital Currency Group, is currently hunkered down, with a key unit on the brink of bankruptcy.

Why it matters: The crypto winter is laying bare the degree to which the "whales" in the space, including billionaires like Silbert, willingly took on ludicrous risks, even as they painted themselves in public as sober entrepreneurs who would embrace regulatory constraints.

The big picture: Silbert became dynastically wealthy by getting two big things right. The first was to make a huge bet on bitcoin very early on, in 2013. The second was to create a box known as GBTC, that would do nothing but own bitcoin, and that would be listed on the over-the-counter markets.

  • GBTC was an early way for individual and institutional investors to own bitcoin without having to worry about being hacked or even having to move money out of their stock-market brokerage accounts.
  • It was also a license to print money for Silbert, who charged a 2% management fee to his company, Grayscale, for overseeing the box. That fee amounted to $615 million in 2021 alone.

Between the lines: GBTC threw off so much cash because other crypto players, including the doomed 3 Arrows Capital (3AC), invested billions of dollars into its shares when they were trading at a premium to the underlying bitcoin.

  • All that money ended up flooding the market with GBTC, which is currently trading at a 45% discount to the bitcoin in the box.
  • Grayscale is now in a legal fight with a hedge fund called Fir Tree, which complains that GBTC acts as a roach motel: Bitcoin can go in, but it can't ever come out. If Grayscale allowed investors to redeem GBTC shares for bitcoin, the share price would surge — but Grayscale would lose substantially all of its management fee.

Zoom out: Silbert looks as though he gambled away the cash being thrown off by GBTC. Another one of his subsidiaries, Genesis, lent billions of dollars not only to 3AC but also to Alameda Research, the crypto trading vehicle now in bankruptcy alongside FTX. The Alameda loans, per Reuters, were secured by FTX's in-house currency, FTT.

  • Silbert's Digital Currency Group also took equity stakes in an astonishing number of other companies — over 200, according to the WSJ.
  • DCG was valued at $10 billion in a late 2021 funding round led by SoftBank, but none of the $700 million raised went to shore up DCG's balance sheet; all of it went to employees selling stock.
  • Genesis barred customer withdrawals last month.

The bottom line: For most of us, investing in cryptocurrency at all is ridiculously risky. I like to think that if I'd bet massively on bitcoin in 2013, that would suffice for one lifetime in terms of generating outsize wealth.

  • For the biggest players in crypto, however, there never seems to be any limit to how much is enough. They go on to take ever greater risks — some of which can be big enough to endanger everything they built up over a decade.
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