17th November 2022 > > Contagion.

tl;dr

Contagion.

Market Snap

Market Wrap

Though the environment for risk markets is relatively benign, I see little scope for a crypto market recovery whilst there is risk of further contagion. See below.

Curious Cryptos’ Commentary – Contagion I

Just yesterday I expressed the hope that more than a week after the FTX fraudulent fiasco that we might get by with no further contagion. I was wrong.

Genesis Global has two main businesses one of which remains operational. That business, Genesis Global Trading, is a trading and custodial operation. As of yesterday the institutional loan business, Genesis Global Capital, was effectively put on hold. Over to Amanda Cowie, vice president of communications and marketing at DCG (Digital Capital Group) the parent of Global Trading and Global Capital:

“Today Genesis Global Capital, Genesis's lending business, made the difficult decision to temporarily suspend redemptions and new loan originations. This decision was made in response to the extreme market dislocation and loss of industry confidence caused by the FTX implosion."

Genesis Global Trading was affected by the earlier collapse of 3AC hedge fund to the tune of $1.2bn. It now finds it has $175mm of funds locked up in FTX, on which any recovery will take years to materialise. Its parent company, Digital Currency Group, injected $140mm of equity which appears to have plugged that hole.

However, the liquidity and solvency of Global Capital was threatened by ongoing withdrawals.

Curious Cryptos’ Commentary – Contagion II

Gemini is a centralised cryptocurrency exchange founded by the Winklevoss twins, who previously tried to claim copyright ownership over Facebook.

Gemini had a partnership with Genesis Global Capital to lend customers’ funds to earn a return for their clients under a program called “Earn”. Those funds are now frozen, Gemini put out a statement:

“We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days. We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible.“

This means that even though Gemini is still fully functional – at least for now – a material proportion of their retail clients’ funds are now inaccessible with no visibility on when that situation might change.

Curious Cryptos’ Commentary – Contagion III

Gemini has its own native stablecoin, predictably called GUSD (Gemini Dollar).

Lending rates for GUSD on decentralised borrowing and lending platform AAVE spiked to over 80% yesterday, presumably caused by demand from those wishing to short it, if Contagion II had led to huge outflows from Gemini, potentially putting its own existence at risk.

I am happy to report that these lending rates have now returned to 2% and that the dollar peg for GUSD did not seem to be threatened, but unless and until Gemini gives more clarity on both their reserves and liabilities, this is one to keep an eye on.

Curious Cryptos’ Commentary – Contagion IV

Genesis Global Capital is the liquidity provider for the Grayscale Bitcoin Trust, the nearest thing we have to a BTC cash ETF in the US.

Though no funds owned by the Trust are at risk, and no liquidity is currently required (with a discount to net asset value of around 40% no new shares in the trust are being issued) this association can only be negative for the sentiment around Grayscale and its suite of institutional and retail investment offerings in the crypto space.

Curious Cryptos’ Commentary – Contagion V

Let us hope not …