Currently, there is a possibility that Genesis Global Capital may be going under. The firm serves as a connection between institutional investors (big players) and the digital asset markets. It helped large firms trade, borrow, hedge, and perform all other activities in crypto markets.
Risky lending practices, jumping in to save troubled lenders, and simply overleveraging are the main reasons for most recent implosions.
But can it be all so simple?
Read on to discover why Genesis may be going under and why that may be important for your digital assets.
Funds Drying up
The crypto space keeps reverberating due to the collapse of Sam Bankman-Fried’s empire, and Genesis Global Capital may be the next victim. Genesis started in 2013 as an over-the-counter Bitcoin desk. Over-the-counter (OTC) basically means trade between two parties without a central exchange.
Imagine that I have one BTC, and you have 13.5 ETH; we meet up for coffee and exchange these two assets at 1:13.5 using our wallets and no intermediaries. This would be an OTC trade; if we would make this a recurring thing with more users, an OTC desk/business could be created, which is what Genesis did.
Fast forward to November 16, 2022, when Genesis suspended withdrawals due to “unexpected market turmoil.” According to a Bloomberg report, the firm was looking for $1 billion in fresh capital.
The cause for this?
A liquidity crunch caused by the collapse of FTX, as Genesis had $175 million locked in an FTX trading account.
But can one of the largest institutional lenders go down for such a “paltry sum”?
Perhaps there was something else?
Sins of the Past
When the beleaguered hedge fund 3AC was imploding and documents complied by the liquidators in the process, it came out that Genesis lent $2.4 billion to 3AC. Needless to say, these funds had to be written off, as 3AC bankruptcy proceedings were one of the first dominos to fall, which pushed crypto into a new crypto winter. The term crypto winter basically means a long downturn in cryptocurrency prices.
In June 2022, Babel Finance, a CeFi platform (a platform that is a custodian of users’ digital assets), filed for bankruptcy, losing over 8,000 BTC while trading clients’ funds. After the bankruptcy proceedings, it was revealed that Genesis had a lot of exposure to Babel Finance.
Finally, the icing on the cake was the connection to Alameda Research; if you haven’t already, read our piece on the fall of Bankman-Fried. The Genesis trading wallets had a lot of interactions with Alameda wallets, where FTT token was among the top 4 received.
Genesis wallets trading with Alameda. Source: Twitter
Why does this matter?
Well, FTX is imploding along with its FTT token, while Genesis exchanged ETH for FTT and held a collapsing coin as collateral.
But why would the potential collapse of one of the biggest institutional lenders affect my yield, you may ask?
Here’s why!
The yield trap.
Many cryptocurrency yield platforms use Genesis to help their customers earn yield. Let’s take Gemini, for example. Using Gemini Earn, you can earn up to 8% return on your assets per year (APY). But this is what happens behind the scenes. You park your crypto into Gemini, and Gemini gives your crypto to Genesis.
Genesis lends your crypto to institutions or funds for a fee, part of this fee is then returned to Gemini, and part of that goes back to you.
Gemini Earn description. Source: Gemini
This enchanted circle works if the counter-parties of Genesis have the means to repay them. If Genesis can’t get the borrowed crypto back, neither can Gemini, and in the end, neither can you.
This business model was not hidden, and users were able to understand this before depositing their funds. The fact that Genesis published its earnings could have given users the breadcrumbs to pull their funds from the platform a bit earlier. Here are the details.
Breadcrumbs in Quarterly Reports
While crypto markets were booming in Q4 2021, Genesis did $30.8 billion in trading. Meanwhile, their latest earning report for Q3 2022 showed “just” $9.6 billion in trading, while other key indicators like active loans also fell drastically. While these numbers may be tied to the general decrease in crypto markets, users could have seen that Genesis will face liquidity issues.
As the liquidity squeeze hit, Genesis reached out to Appolo Global Management attempting to secure more funding, but it seems that Appolo will not commit to a deal. While this lasts, it is likely that Genesis will keep its hold on withdrawals, affecting also Gemini Earn, which paused redemptions from its Earn product. Allegedly, Gemini has $700 million of customers’ funds in the Earn program.
What Does This Mean for the Crypto World?
While Genesis is not as well-known as FTX, a potential collapse could be quite impactful. The firm is important for the day-to-day functioning of the entire crypto world, as it facilitated $116.5 billion in trades in 2021 and connected institutional money to the crypto world. The Financial Times described Genesis as the Goldman Sachs (a large US bank and lender key to US financial markets) of crypto.
Therefore a potential collapse of such an intermediary as Genesis could turn back the clock on crypto and set it back a few years, which in crypto is akin to decades. Users may end up losing all of their money, which is bad, but institutions may also lose, which is worse. While this may sound controversial, let’s unpack it and see why institutions bear more weight.
Institutional Money is Key for Crypto
Institutional funds are key for the future of crypto because venture capital money speeds up projects and crypto adoption. If money in crypto is lost due to poor financial decisions and poor business practices, institutional money could flow in other directions, leaving crypto starved for funds. The loss of confidence by institutions in crypto may doom it to mediocrity and even death in the long run. However, there is a second scenario that could play out if Genesis collapses.
Potential Scenarios
The crypto lending market itself may collapse under the weight of the FTX and potential Genesis collapse. While bad in its initial stages, it could be good in the long run, and here is why.
It could push users, institutions, and projects toward decentralized finance and lenders. These lenders support only overcollateralized loans, in essence, borrowers need to lock up assets of greater value than the ones they’re borrowing. For example, if I wanted to borrow 10,000 USDT coins, I would have to lock up 1.5-2 BTC for such a loan, reducing the chance of default for such a lender.
Unlike such lenders, Genesis as a lender seems risky, as some business approaches were not transparent. The developments around Genesis may usher in the death of lending by centralized services, which may not be a bad thing. However, for this to happen, some users, and institutional investors have to bear the pain, which is never fun but has to be done for progress to occur.
Finally, the recent developments in the crypto world could lead to more regulation being introduced. More regulation could lead to more companies joining the space as they would understand the risks. In the end, such a development could usher in more stability for the entire space.
