A Crypto Magnate Saw the Risks and Still Was Hammered
January 18, 2023

By Gregory Zuckerman, Vicky Ge Huan ,Caitlin Ostroff

The cryptocurrency crunch is so bad even the pros are getting squeezed.

A year ago, Barry Silbert’s 40% stake in Digital Currency Group Inc., or DCG, was valued at more than $3 billion. A crypto conglomerate, with tentacles in nearly every corner of the industry from lending to bitcoin mining, DCG worked out of plush Connecticut offices featuring a marble-countertop kitchen with a coffee barista and a French chef.

Mr. Silbert is a 46-year-old finance veteran who began his career working on restructurings and dealing with downturns. Unlike many crypto executives, he tweeted warnings about the risky behavior he saw in digital assets, suggesting he anticipated what could go wrong.

Today, Mr. Silbert is trying to keep DCG’s lending firm out of bankruptcy. Other DCG businesses, such as fund manager Grayscale Investments, bitcoin miner Foundry and media-and-events provider CoinDesk also face significant challenges.

Where the fall of crypto exchange FTX and Sam Bankman-Fried is a story of inexperience and alleged fraud, the crisis at Mr. Silbert’s company is about the sort of missteps that have repeatedly tripped up financiers who got too optimistic, including growing too fast, doing business with the wrong people and borrowing big money, in DCG’s case even from a subsidiary.

Mr. Silbert built his company on Warren Buffett’s model and counted among its investors or advisers former Treasury Secretary Larry Summers, Silver Lake co-founder Glenn Hutchins and Bain Capital Ventures. Even so, DCG ran up heavy debts to expand.

“The organization got so big. It was almost like a victim of its own success,” said Mike Alfred, founder of Digital Assets Data, which once was part of DCG’s venture portfolio. “Barry was no longer able to manage the risk management himself at every subsidiary.”

Among the headaches Mr. Silbert now is dealing with:

•DCG lending firm Genesis Global Capital—once the largest source of lending in crypto, with $131 billion of new loans in 2021—said in November it was unable to meet client withdrawals. It stopped making new loans, laid off nearly half of its staff and recently said it might file for bankruptcy if it can’t raise new cash.

•The Securities and Exchange Commission on Thursday sued Genesis, along with cryptocurrency exchange Gemini Trust Co. LLC, alleging that a program the two ran to give investors a chance to earn market-beating returns in crypto violated investor-protection laws.

•The value of Grayscale Bitcoin Trust, a publicly listed investment vehicle managed by a unit of DCG, has fallen 63% in the past year and as of Friday traded at a yawning 36% discount to net asset value. Assets it manages have dropped to $12.3 billion from over $40 billion in 2021, reducing the fees it can collect.

•DCG’s venture investments as well as its mining, media and other businesses have also tumbled in value amid the sharp crypto downturn.

“This past year has been the most difficult of my life,” Mr. Silbert wrote to his shareholders on Jan. 10.

The Grayscale booth at the Exchange ETF Conference in Miami Beach last April.PHOTO: EVA MARIE UZCATEGUI/BLOOMBERG NEWS

In an interview, he expressed confidence the crypto industry will rebound and DCG with it. "There’s no question about our survival,” Mr. Silbert said. “We have fantastic businesses, great investments and an amazing team.”

Mr. Silbert said much of the trouble at Genesis, its lending firm, is due to the unexpected collapses of FTX and a big hedge-fund client, as well as crumbling crypto prices. He said that he and his colleagues are working hard to find a solution and that other DCG subsidiaries and investments will emerge as strong entities.

Mr. Silbert has successfully navigated past downturns. People who have worked with him said that many of DCG’s businesses remain profitable and retain strong prospects if cryptocurrencies stabilize.

Once an investment banker at Houlihan Lokey, Mr. Silbert in 2004 founded SecondMarket, an online trading platform that paired buyers and sellers of shares of private companies, mortgage-backed securities and of other hard-to-trade assets. In 2011, he learned about bitcoin, was immediately intrigued by its potential as an alternative to gold and became convinced it would form the basis of a new, digital financial system.

He bought bitcoin when it traded below $10, he says, compared with a recent prices of a little over $21,000 and a 2021 peak above $68,990. As it rose, he invested a few hundred thousand dollars of his personal money in companies building an infrastructure around crypto.

“I was excited about the potential for a borderless, frictionless form of digital money,” he said. Around the office in 2012, “I wouldn’t shut up about bitcoin.” He persuaded the SecondMarket board to create the entity that became Grayscale Bitcoin Trust.

After SecondMarket was sold to Nasdaq Inc., Mr. Silbert started DCG in 2015 to create an organization that invested in crypto-related companies. After a yearslong investing spree, DCG now has six subsidiaries and invests in more than 200 crypto-related startups and more than 50 crypto funds, digital tokens and blockchain projects.

Few of DCG’s executives pushed back on the rapid growth, according to people close to the matter. Nor, they said, was there resistance from the financial giants who invested in DCG, acted as advisers or were on its board of directors. Among those, Mr. Hutchins and Mr. Summers cut ties with DCG in recent months.

Representatives of both men declined to comment. So did Bain.

Barry Silbert speaking during the Skybridge Alternatives conference in Las Vegas in May 2019.PHOTO: JOE BUGLEWICZ/BLOOMBERG NEWS
DCG brokerage firm Genesis Global Trading, once the largest source of lending in crypto, said in November it was unable to meet client withdrawals.PHOTO: GABBY JONES/BLOOMBERG NEWS

Unlike some in the crypto world who have cultivated public personas via TV appearances or bold predictions, Mr. Silbert usually avoided speaking publicly. People who’ve worked with him say he is uncomfortable making small talk and has three computer screens on his desk, where he keeps Twitter and CNBC running. On vacation, Mr. Silbert often lugs piles of books to the hotel pool, his wife once told a colleague of his.

Mr. Silbert made clear to staffers that DCG wouldn’t go public. As crypto raced higher and some in the industry made flashy purchases, he told colleagues they were building “generational wealth” and urged them not to flaunt it.

“You don’t want to be a target,” a former colleague remembers him saying. A DCG spokeswoman said Mr. Silbert didn’t recall the comment.

Around 2020, Mr. Silbert decided to move most of the businesses from lower Manhattan to Stamford, Conn., where he lived. DCG spent $50 million renovating an office there, hoping to attract young staffers. The work included installing a fancy kitchen where the chef handles lunch requests such as grilled octopus. Mr. Silbert usually brings his own meals to work.

Genesis remained in New York, where it hosted a 2021 Christmas party at a Cipriani restaurant featuring a full orchestra, a DJ, a huge treats bar, a fortune teller, arcade machines and champagne towers. Mr. Silbert didn’t attend the event.

Mr. Silbert doesn’t like to manage employees, according to those close to him. Instead, he focuses on allocating capital and defers day-to-day decisions to each unit’s management.

In June 2021, with cryptocurrencies still strong, Mr. Silbert tweeted: “There is a daisy chain of borrowers and lenders in the crypto space—most well capitalized, but some are not...Important to understand counterparty risk and where are the weak links in the chain.”

Still, in early 2022 DCG borrowed nearly $500 million from its own Genesis lending firm—on top of thousands of bitcoin it borrowed from Genesis in 2021 and 2022—to invest in stocks and digital tokens and to repurchase shares from investors.

DCG was valued at $10 billion at the time and had annual cash flow of more than $1 billion, the company says, which to Mr. Silbert and his colleagues justified the borrowing.

Genesis lent heavily to Three Arrows Capital Ltd., a Singapore hedge fund that was betting on the cryptocurrency TerraUSD. Last year, Genesis had loans amounting to $2.4 billion to Three Arrows. Eighty percent of the credit was collateralized in the form of bitcoin, ether, units of Grayscale Bitcoin Trust, the Grayscale Ethereum Trust and other hard-to-trade cryptocurrencies, according to court documents and people familiar with the matter.

TerraUSD cratered in May, and Three Arrows too went under, saddling Genesis with huge losses as its loan collateral plunged in value.

DCG absorbed Genesis’s liabilities and has filed a $1.2 billion claim against Three Arrows. A founder of Three Arrows declined to comment.

Genesis’s troubles deepened with FTX’s collapse in November. Genesis had lent hundreds of millions of dollars to the crypto exchange’s sister trading firm, Alameda Research, The Wall Street Journal reported. Genesis said on Nov. 10 that its derivatives and trading business had about $175 million “in locked funds” in its FTX trading account.

Late last year, Mr. Silbert began negotiating to save Genesis and revive DCG, which is on the hook for a $1.1 billion promissory note to Genesis related to the default of Three Arrows Capital.

Genesis creditor Gemini Trust, the cryptocurrency exchange founded by Cameron and Tyler Winklevoss, has pressured Genesis to return more than $900 million in Gemini customer deposits. On Twitter, Cameron Winklevoss posted what he called an open letter to Mr. Silbert accusing him of “bad faith stall tactics.”

“This is another desperate and unconstructive publicity stunt,” said a DCG spokeswoman. She said DCG “will continue to engage in productive dialogue with Genesis and its creditors with the goal of arriving at a solution that works for all parties.”

Tyler Winklevoss (left) and Cameron Winklevoss, founders of Gemini Trust Co., at the cryptocurrency conference Bitcoin 2021 in Miami in 2021.PHOTO: MARCO BELLO/AGENCE FRANCE-PRESSE/GETTY IMAGES

In Thursday’s lawsuit by the SEC against Genesis and Gemini, the regulator said that Genesis should have registered its crypto-lending product, which would have required it to provide clients with detailed financial disclosures. A Genesis spokeswoman declined to comment on the suit, as did DCG.

Tyler Winklevoss tweeted that Gemini Trust had discussions with the SEC for more than 17 months, but the agency never raised the prospect of enforcement action until Genesis paused withdrawals. The SEC didn’t respond to a request for comment.

In December, Fir Tree Partners, a New York hedge fund, sued DCG’s Grayscale Investments in Delaware Chancery Court seeking details about it in order to investigate what Fir Tree alleged were mismanagement and potential conflicts of interest. A group of smaller shareholders is trying to force fee cuts, a management shakeup and other changes.

“It has been challenging to have my integrity and good intentions questioned after spending a decade pouring everything into this company and the space with an unrelenting focus on doing things the right way,” Mr. Silbert said in his shareholder letter.

A Grayscale spokeswoman called the suit baseless and said, “We look forward to clarifying the numerous mischaracterizations about our company and products.”

The Grayscale Bitcoin Trust pocketed investor fees of $615 million in 2021, according to the latest regulatory filings. Analysts said it remains a money-maker. But the crypto selloff means all of DCG’s assets are likely worth fractions of what they were a year ago. DCG closed its wealth-management business, HQ, about two weeks ago to cut costs.

“If you believe that the industry is going through its latest period of reckoning and will rebound, as we do, we will be a leader in the space,” Mr. Silbert said. “We have a great group of businesses, and we’re working through this.”

Alexander Saeedy contributed to this article.






This article is for informational purposes only. It is not offered or intended to be used as investment or other advice.