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Genesis seeks cash injection
If you are unfamiliar with Genesis Trading, maybe you should. They represent the basic infrastructure of the institutional investor base in the bitcoin and broader crypto markets. For lending, trading, hedging, exchange yields and more, Genesis Trading was the brokerage to facilitate all of this activity in the space. Remember those juicy returns from BlockFi and Gemini Earn products in space? Genesis is the intermediary between these platforms and hedge funds to generate this return.
Genesis held a brief customer call to announce the suspension of redemptions, withdrawals and new loans. With exposure to FTX and Alameda Research, the company now needs a further injection of cash after having almost 175 million dollars blocked in a trading account with FTX. As a first response, parent company Digital Currency Group (DCG, Grayscale’s parent company), injected $140 million into the company to keep operations running smoothly. Yet Genesis is now scrambling to find more capital. That’s the reason Gemini Win had to stop taking samples.
Although Gemini said the rest of its operations were running normally, the Gemini Earn product throttling and service disruptions on the platform appear to have triggered a small rush to remove bitcoin from the exchange: 13% of total balance of bitcoin is gone. in the past 24 hours. As we’ve pointed out before, exchanges aren’t the place to be for your bitcoin, especially when there’s a high probability that there’s another exchange (or even several) left to go down.
To give you an idea of the size, Genesis had $50 billion in loans in a quarter and an active loan portfolio of $12.5 billion at the market peak in 2021. Still, loan originations and the active loan portfolio have both been heavily discounted, falling to $8.4 billion and $2.8 billion respectively, in the third quarter of this year. In July, Genesis filed a $1.2 billion claim against Three Arrows Capital which was taken over by DCG to keep the hit off the books of Genesis. The loans were partially collateralized by shares of GBTC, ETHE, AVAX and NEAR tokens.
We know of chain activity that Genesis had tons of interactions with Alameda, Gemini and BlockFi through their OTC trading desk; FTT was also one of the main tokens received and sent in this activity. Without Genesis sharing more details, we don’t know the extent of exposure and capital needed to make customers whole. Still, the fact that parent company DCG has yet to step in to provide another cash injection is a warning sign of where this could end up. News has surfaced that Genesis is immediately seeking a $1 billion credit facility. Not good.
In the worst case, the lack of funding provided by the DCG could raise questions about accessible liquidity. DCG and Grayscale have trusts dissolved before and this option is not on the table. This is an unlikely path but certainly worth highlighting since Grayscale is the largest bitcoin holder via the Grayscale Bitcoin Trust, holding almost 633,600 bitcoin. This could easily be a regulatory issue or some other limitation (which we don’t know about) where DCG cannot provide the capital to Genesis.
Circle, the issuer of the USDC stablecoin, also has ties to Genesis. Yet they point out that their product Circle Yield is only $2.6 million of outstanding guaranteed loans, which, if true, is quite insignificant.
We’ll likely hear more about the state of Genesis in the coming days as they want/need the capital injection by Monday. It would be a blow to a long list of institutions in the sector if withdrawals remained suspended and funds blocked. Genesis reflects the exact reason why the global contagion of the collapse of FTX and Alameda Research has yet to occur. Defaults and insolvencies come in waves, not all at once. It takes weeks and months to see where the biggest holes are and who has liquidity, counterparty and/or insolvency issues.
On top of that, almost all major players and market makers have withdrawn their cash from exchanges to shore up their own balance sheets and reduce counterparty risk. Liquidity in the market is thin and the time has come for volatility to ensue. Although the market appeared to find a temporary bottom amid all the negative headlines over the past week, the unknown downside risk still far outweighs the short-term upside potential.