The Crypto Reaper comes calling for Genesis

Life comes at you fast in crypto, as customers of FTX have discovered this month. It now looks like the latest frostbitten victim of the crypto winter is Genesis — basically the Goldman Sachs of magic beans.

From Bloomberg overnight:

Digital-asset brokerage Genesis is struggling to raise fresh cash for its lending unit, and it’s warning potential investors that it may need to file for bankruptcy if its efforts fail, according to people with knowledge of the matter.

Genesis has spent the past several days seeking at least $1 billion in fresh capital, said the people, who asked not to be identified because discussions are private. That included talks over a potential investment from crypto exchange Binance, they said, but funding so far has failed to materialize.

The rush for funding was precipitated by a liquidity crunch at the lender after the sudden collapse of FTX, one of the world’s largest crypto exchanges. Genesis halted redemptions shortly after revealing on Nov. 10 that it had $175 million locked in an FTX trading account.

We should stress that Genesis told the Borg that “we have no plans to file bankruptcy imminently . . . Our goal is to resolve the current situation consensually without the need for any bankruptcy filing. Genesis continues to have constructive conversations with creditors.” (The “imminently” bit certainly fills us with confidence.)

Genesis is not some small Johnny-come-lately to crypto. It first started trading bitcoin back in 2013, and says that last year it arranged over $130bn of crypto loans, traded $116bn worth of bitcoin and almost $54bn of crypto derivatives. It is a cornerstone of the Digital Currency Group empire of former Houlihan Lokey investment banker Barry Silbert.

The magic bean to rule all magic beans has not taken kindly to the latest round of contagion gripping another major industry player, with bitcoin back below $16,000.

That’s not all. Look at what has happened to the other major pillar of Silbert’s DCG, the Grayscale Bitcoin Trust. Back in the halcyon days of . . . 13 months ago, GBTC’s assets peaked at almost $40bn. Today, it stands at about $10bn.

Worse, investors have been dumping its shares so violently that they now trade at a record 45 per cent discount to the current market value of the bitcoin that it holds. That is an astonishing gap on an apparently ringfenced trust. (For context: people freaked out when big credit ETFs traded at a 5-8 per cent discount to NAV back in March 2020).

There are various ways to look at this. One is whether this indicates that people don’t believe GBTC actually owns the bitcoin it says it does, as Matt Levine discussed on Monday. Speculation round that idea wasn’t calmed by Grayscale declining to share cryptographic proof of reserves due to “security concerns”.

But like Matt, we’re unconvinced by this argument. GBTC is registered with the SEC, audited, and its NYSE-listed and regulated custody agent Coinbase has confirmed that the bitcoin are all there. The massive discount is better explained by the absence of any ETF-style arbitrage mechanism.

As money poured into the trust, its shares actually generally traded at a premium to the bitcoin it held, so GBTC issued a lot of new shares to soak up demand and buy more bitcoin. But now that the tide has reversed, there is no easy way to arbitrage the gap and align the share value and NAV of GBTC (there’s an interesting saga around Grayscale’s attempt to convert the into a more classic ETF, which our colleague Steve Johnson gets into here).

Anyway, the common ingredient is Silbert’s DCG, which in a twist of fate also owns CoinDesk — the media outlet that broke the news of Alameda’s iffy balance sheet earlier this month and triggered the latest crypto convulsions.

But this is a far broader story at the moment, with the crypto grim reaper surveying at a target-rich environment, with even stronger players looking a little pallid. Coinbase shares fell another 8 per cent yesterday to give it a market cap of under $10bn (it IPO’d at a $76bn valuation last year, more than the NYSE’s parent ICE).