Crypto Reaper comes calling Genesis

Life comes fast in crypto, as FTX customers discovered this month. It now appears that the latest frostbite victim of crypto winter is Genesis — basically a Goldman Sachs of magic bean.

From Bloomberg overnight:

Digital asset brokerage Genesis is struggling to raise new funds for its lending unit, and is warning potential investors that it may need to file for bankruptcy if its efforts fail, according to people familiar with the matter.

The people, who asked not to be identified because the discussions are private, said Genesis has spent the past several days seeking at least $1 billion in new capital. This included talks about a potential investment from cryptocurrency exchange Binance, they said, but funding has yet to materialize.

The rush to finance was the cause of a liquidity crunch at the lender after the sudden collapse of FTX, one of the world’s largest cryptocurrency exchanges. Genesis halted redemptions shortly after revealing on November 10 that it had $175 million locked away in an FTX trading account.

We must stress that Genesis told Borg: “We have no plans to declare imminent bankruptcy . . . Our goal is to resolve the current situation by mutual consent without the need for any bankruptcy filing. Genesis continues to have constructive talks with creditors.” (The “imminent” part sure fills us with confidence.)

Genesis is not a little johnny who recently came to crypto. It first began trading bitcoin in 2013, and says last year it has arranged more than $130 billion in crypto loans, and has traded $116 billion worth of bitcoin and nearly $54 billion in crypto derivatives. It is the cornerstone of the Digital Currency Group empire of former Houlihan Lockey investment banker Barry Silbert.

The magic pill to control all the magic beans has not moved so kindly to the latest round of infection gripping another major player in the industry, with bitcoins back below $16,000.

That’s not all. Look at what happened to another major pillar of Silbert’s DCG, Grayscale Bitcoin Trust. Back in the days of Halcyon. . . 13 months ago, GBTC assets peaked at nearly $40 billion. Today, it’s about $10 billion.

Even worse, investors have been dumping their shares so violently that they are now trading at a record 45 percent discount to the current market value of the bitcoin you hold. This is an amazing confidence gap that seems to be closing. (For context: People freaked out when large-credit ETFs traded at 5-8 percent discount to NAV in March 2020.)

There are different ways of looking at this. One is whether this indicates that people do not believe that GBTC actually owns the bitcoin it says it owns, as Matt Levine discussed on Monday. This idea was not sated by Grayscale’s refusal to share cryptographic proof of reserves due to “security concerns”.

But like Matt, we’re not convinced by that argument. GBTC is registered with the SEC, audited, and NYSE-listed and regulated custodial agent Coinbase has confirmed that all bitcoins are there. The massive discount is best explained by the lack of any ETF-style arbitrage mechanism.

As money poured into the trust, its shares generally traded at a premium to the bitcoin they held, so GBTC issued a lot of new shares to absorb demand and buy more bitcoin. But now that the tide has turned, there’s no easy way to balance the gap and align GBTC’s equity value and net worth (there’s an interesting saga about Grayscale’s attempt to turn it into a more classic ETF, which our colleague Steve Johnson gets into here).

In any case, the common component is Silbert’s DCG, which also owns CoinDesk – the media outlet that broke Alameda’s inaccurate budget news earlier this month and sparked the latest crypto turmoil.

But that’s a broader story right now, as the crypto harvester makes a sweep in an objective-rich environment, with stronger players looking a bit pale. Coinbase shares fell another 8 percent yesterday to give it a market cap of just under $10 billion (the IPO was $76 billion last year, more than NYSE parent ICE).