Are Genesis and Grayscale In Crisis? Is the Crypto World in Danger?


After the FTX bankruptcy, bad rumors spread about Genesis and Grayscale. Genesis born in 2013 is the largest institutional lender/trading desk/OTC in the world. What volumes are we talking about? Over $160 billion traded annually (spot market and trading) and over $130 billion in loans and is part of the Digital Currency Group (DCG) conglomerate.

Digital Currency Group manages:
-Genesis
-Grayscale
-Foundry (digital asset mining and staking)
-Luno (digital asset exchange based in London)
-TradeBlock (trading for institutional)
-HQ (digital asset management platform)
-CoinDesk (the portal that brought up the FTX problems)

DCG is a Venture Capital firm (founded in 2015) that has invested in over 200 crypto projects as of 2021. Curiously these days, DGC would have removed the "Who We Are" page which contained names, photos and biographies of its employees. Genesis stopped payments from its crypto lending department last week. Gemini (which had interactions with Genesis) also put its interest program on hold; on the other hand, Ledn, a lending platform for retails, stated that they had closed interactions with them in October. All this has not only sparked a series of rumors about possible liquidity holes of Genesis but also about the future of DCG. Genesis would need about $1 billion in cash to pay off some loans (they say only $175 million is stuck on FTX). DCG did not step in to “help” Genesis and according to Bitmex CEO's July posts, DCG reportedly had interactions with bankrupt Three Arrows Capital and Babel Finance (to cover Genesis' liquidity crunch).

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Grayscale, on the other hand, was born in 2013 and is one of the largest holders of Bitcoin in the world (as mentioned, they are also part of the Digital Currency Group), basically it is a custodian of assets (a trust) that holds them instead of the legitimate owners. In a nutshell, the investor buys GBTC (Grayscale Bitcoin Trust), i.e. shares listed on the stock exchange that track the price of Bitcoin and they give the right to a share of that Grayscale trust. The idea is precisely to buy through a premium (lower cost than the Bitcoin spot market). GBTC holds about 643,000 Bitcoin (about 3% of the supply) and discounts a price divergence from spot BTC of about 50%. In the general panic caused by the failure of FTX, Grayscale refused to provide the details of their addresses on chain (proof of reserve), according to them for security reasons.

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These Bitcoin are contained in the Coinbase Custody and they collateralize these GBTC (for more info: Coinbase: Safety And Security Letter). Coinbase Custody emphasized that these assets are merely custody and are owned by Grayscale and under no circumstances may they be lent or invested. Since Coinbase is the custodian of these BTC, if there is no liquidity they would be the ones committing the fraud and almost certainly their shares (Coinbase is publicly traded with COIN) would quickly go to 0 (and their executives in jail).

 

PERSONAL CONSIDERATIONS
When there are negative events (Terra, Three Arrows Capital, Celsius, BlockFi, Voyager, FTX) more and more catastrophic news comes out. A lot of FUD often unjustified. We have to be good at filtering background noise and distinguishing events that could be dangerous from simple FUD. For years, a lot of FUD has also affected USDT which, however, has never had problems in executing the redeem 1 USDT=1 real dollar. In this case, a possible insolvency of Genesis and Grayscale would have catastrophic effects on the entire market. Clearly if Coinbase had lied it would be an even more serious thing: trust in the entire sector would begin to be lacking.

 

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