Key Institutional Crypto Player, Genesis, on Verge of Failure; Possibility of “Apocalyptic” Bitcoin Liquidation

Due to the fact that your humble blogger is not feeling so hot, forgive me for giving you a thin treatment of the wobbles and likely-looking collapse of a key crypto concern, Genesis. However, two excellent tweetstorms cover most of the key ground, and I will direct you to them shortly.

The unwind of FTX is certain to dominate business press, pundit, and politician attention due to how its uber connected and very recently idolized top brass have been revealed as drug-addled business incompetents who neverless seem to have done a very good job at disappearing a lot of the moolah, presumable for their personal use. The level of media noise and coming prosecutions (both the Southern District of New York and Bahama are reportedly ginning up filing) and the failure of supposedly sophisticated player to find anything amiss will presumably chill interest in crypto, particularly if other firms fall over due to FTX contagion.

If Genesis is one of them, it has the potential to be particularly damaging to the ambitions of crypto promoters for these speculative coins to become a serious alternative to fiat. Genesis provided a traditional suite of investment services together called prime brokerage to institutional investors, as in big money players. Importantly, as I understand it, Genesis was the only real contender in that space. That might sound really attractive (who doesn’t want to be a de facto near monopoly provider?) but it’s dangerous when you are the big market-maker trading (and more important, therefore holding large positions in) highly volatile assets.

So major institutions may have direct exposure if Genesis fails. And even if they don’t, the prospect that they could have will dampen institutional investor enthusiasm, particularly if unflattering facts come out during a bankruptcy.

Genesis took a body blow when hedge fund Three Arrows Capital failed. Genesis has lent to the tune of $2.4 billion. Genesis’ parent Digital Currency Group, filed a claim in bankruptcy court in July or $1.2 billion.

An update from the Financial Times in August:

Crypto broker Genesis will cut a fifth of its staff and replace its chief executive as it counts the cost of lending $2.4bn to hedge fund Three Arrows Capital…

Many of the industry’s best-known names, including Voyager Digital, BlockFi and Deribit, were also forced to liquidate some of Three Arrows’s positions when the investment shop failed to meet margin calls. Court documents showed that Genesis had lent Three Arrows $2.4bn in undercollateralised loans.

Genesis’s parent company Digital Currency Group, founded by investor Barry Silbert, has taken over the trading firm’s liabilities related to Three Arrows and lodged a $1.2bn claim in the US bankruptcy case.

You can see how the story changes as FTX unravels:

Bloomberg reported on November 21 that Genesis was trying to raise money and might have to file for bankruptcy.

To spare you further suspense:

Some of the highlights:

And here is why Genesis is particularly important to the crypto ecosystem. Again the entire tweetstorm is very much worth your attention, but some highlights:

So you heard about a probable big Bitcoin leg down here early.

And for those interested in the prospects for the crypto field regrouping, this tweetstorm explains how Genesis is a particularly important infrastructure provider.

Again, the entire tweetstorm makes for important reading. To whet your appetite:

As we’ve repeatedly pointed out, the supposedly anti-institutional crypto entrepreneurs have over time wound up replicating the key component of the modern finance system. Genesis provided some essential plumbing. Even if it manages to fail gracefully, current customers will have positions frozen and eventually paid out at a loss. And in the catastrophic scenario of a big bitcoin dump, who knows what the knock-on effects will be.

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56 comments

      1. Yves Smith Post author

        I don’t mean to seem as if I am criticizing you, since you are responding to press reports that are far too non-specific, but Blackrock is NOT directly exposed except via looking very stoopid and having poor performance in the involved funds.

        Blackrock is a fund manager. It is not investing Blackrock (parent company that operates funds) money. It is investing the money, mainly of institutions, that invested in PARTICULAR funds that then invested in FTX.

        Reply
    1. Geo

      I was raised in the church so the Genesis I was invested in has left me with a lifelong sense of guilt for original sin, a retroactive chip on my shoulder for being pitched a mythical lie, and a kinky longing to frolic through gardens in my birthday suit.

      No offense to Sting and the guys but anytime I hear the word Genesis I just assume it’s a scam. Why else name something after the original bait and switch?

      Reply
      1. Arizona Slim

        Sting was the front man in The Police.

        Before he went solo, Peter Gabriel was the front man in Genesis. Then, for better or worse, it was Phil Collins.

        Reply
          1. paul

            I concur, unlistenable, but I do not begrudge their success.

            Phil Collins’ regular election time declarations about leaving england/uk if tory hegemony was disrupted was particularly irritating.

            Whenever his anguish popped up in the red tops, I thought ‘promises,promises’.

            Reply
  1. Skip Intro

    Thanks for the preview of the Black Friday BTC sale. $8k sounds like a bargain, if you are into faith-based tokens. I assume a number of ‘events’ may be waiting to take cover under a Thanksgiving/Black Friday news dump.

    Reply
    1. NotTimothyGeithner

      The US runs a hemisphere, worst case. The dollar has value. We wouldn’t only in a breakup, but we are way too homogeneous for that to work.

      My favorite crypto argument was “this small country needs X” as if those countries mattered to non locals. The US is huge.

      Reply
  2. Tom Stone

    I expect BTC to survive, and probably one or two others as well.
    They are simply too useful for obfuscation to face annihilation.

    Reply
    1. Michael Fiorillo

      As David Gerard, an early (not counting this blog) crypto skeptic has said, all Bitcoin needs to survive is two people with computers and an Internet connection. Other than that, how low can it go?

      Last I read, it cost thirteen thousand dollars in electrical power to mine a single Bitcoin: what happens when that floor is breached?

      Reply
      1. Lex

        Early adopters were mostly using it for drugs and other illegal transactions over the internet. Of course it didn’t have the massive value then that it has now. I wasn’t one of them but I have friends who were early adopters and with slightly different decisions (even just saving BTC values that they treated like loose change) would be rich today … or at least when it was pumped up.

        It will still be good for that I assume, although for accepted drugs like cannabis it appears that just moving dollars via Venmo or similar is reasonable enough these days.

        Reply
    2. Tommy Wrinkles

      Crypto has a value in proportion to its utility and the main utility over conventional finance is money laundering activity.

      Litecoin has had a recent protocol upgrade to increase its anonymity. Since the upgrade Litecoin has been dropped from various exchanges because it cannot satisfy regulators aml requirements. So it is interesting that since the upgrade litecoin has been the strongest of the big coins…

      As you say, while there is utility some of these coins will live on.

      Reply
  3. juno mas

    For all the ‘crypto lingo’ that is in the tweets, for me, it might as well be in Russian. What regular bloke understands this stuff?

    Reply
      1. John

        Nouriel Roubini used the term carnival barker for the crypto-criers. Baffle gab to suck in the unwary. And, if as Yves says they are replicating aspects of the financial system, what is the point? The “full faith and credit of the United States government” guaranteeing the dollar may not be as solid as it once was, but it sure is better than some guy saying “trust me.” Same can be said for the Euro, pound, and yen. At least the Russians and the Chinese have gold and tangible commodities.

        Reply
        1. paul

          The unfortunately irrepressible max keiser must be greatly relieved over the western blackout of Russia Today, holding all those bitbug evangelicals in their archives and all.

          I’m sure he’ll be back to putting the pedal to the metals if anyone will take him.

          Crafty, those Russians.

          Reply
  4. Geo

    I’m just an ignorant peasant so I probably don’t have the wisdom of our genius titans of finance but “withdrawal requests which have exceeded our current liquidity” seems like bad business practices. Again, I’m a plebe but things like “don’t count your chickens before they’ve hatched” and “don’t let your mouth write a check your *familyblog* can’t cash” come to mind.

    Reply
    1. Michael Fiorillo

      As they say, you didn’t lose your money when the exchange went belly up; you lost your money when you deposited it with the exchange in the first place.

      Reply
  5. WillyBgood

    I’m running the Jenga exchange with Jenga block coins. Current withdrawals of the coinblocks has left our towering crypto institution teetering. Please think twice and be very careful about your blockcoin withdrawal. We may have to suspend withdrawals to keep the edifice from collapsing, and then it’s game over. Thank you for playing, and remember, only one winner allowed (but plenty of losers).

    Reply
  6. Tom Pfotzer

    Still kicking myself for not buying BC @ $20. I debated it, but bcuz I didn’t really understand blockchain, and didn’t understand (e.g. actually look at) the code for BC, I demurred.

    Ratz. I don’t care if it’s a sardine, a certificate for a sardine, or a gossamer reflection off the ocean of an indirect shadow of a sardine *, $20 exchangeable for $16K a mere few years later…has a certain appeal, does it not?

    Ratz again.

    The other thing that BC did was to suggest that the abiding value of the dollar was questionable, and remember…this was when nobody, not nobody really believed that inflation was about to erupt.

    The concept of public money, not controlled by central authority, that can’t be sanctioned or monitored or otherwise meddled with, that retains its value….has great value.

    Please remember to not throw out the good stuff while we’re trashing the bad.

    We _still_, possibly more than ever, need those capabilities.

    Right now we have the Everything bubble, with all assets denominated in dollars…wouldn’t you just love to have those sort of capabilities at your disposal?

    ===

    * hat tip Tom Stone, above, re: sardines. Nice work.

    Reply
    1. Yves Smith Post author

      I thought hard about buying Apple when it was $19 but deemed that too expensive….which technically it was. Put in buy order somewhere in the $17s that never executed.

      Reply
      1. FreeMarketApologist

        At one point during the financial crisis we were sitting around the office (a trading firm) marveling at the fact that Citibank was trading at less than $1 — a bit below it’s breakup value, even accounting for some of the disasters on (and off) its balance sheet. It’s done quite well since then, but at the time, that trade, while interesting, was considered high risk.

        Reply
        1. Keith Newman

          @Tom P,
          Don’t beat yourself up about Bitcoin. For those of us with a bit of spare cash these things happen. At some point something more modest but pretty good will come up…

          Reply
    2. Lovell

      Bitcoin is not public money. It can never be public money. Sure, some diehards can probably exchange limited goods and services amongst each other with it but it can never go on scale because the issuance of true public money is the exclusive domain of the state.

      The libertarian idea that bitcoin is going to replace the dollar is at best delusional. That it’s tethered to dollar value in spite of its pretenses as replacement currency illustrate that.

      As Nouriel Roubini repeatedly says, the natural value of all crypto is zero.

      Reply
      1. Objective Ace

        Why does one necessarily care if it’s “true public money”? Granted, there’s downsides like hyper inflations and/or bank runs from non public money–but there’s plenty of examples of non-public money being used relatively succesfully

        Bitcoin is also not tethered to the US dollar. I think you mean measured in–which I’m not sure how accurate that is. We notice that here, because US reporters tend to focus on that, but I doubt the people in Turkey do.

        Bitcoins biggest flaw as a currency (IMO) is its volatility and natural deflation tendency (why would anyone want to spend something that they know will be worth more later?)

        Reply
        1. paul

          If a bitcoin’s value is determined in dollars, it is, for good or bad, in sickness of wealth, tethered and measured by the fiat dollars it purports to replace.

          Reply
    3. Michael Fiorillo

      It’s not public money; the Libertarian origins of Bitcoin don’t acknowledge the legitimacy of a public domain.

      While it may not be controlled by a “central authority,” it is effectively controlled by self-dealing cartels.

      It can be sanctioned (look at China).

      It can be monitored (isn’t that part of what the blockchain is supposed to be about?), and is. It is also not anonymous, but pseudononymous, and not all that effectively so.

      As for “retaining its value:” anything that can go down by 70+ percent in a matter of months, when the hated fiat Dollar it’s destined to replace has gained in relative value over the same time period, does not have much going for itself.

      Count yourself lucky you stayed away.

      Reply
    4. thousand points of green

      There is a bright side to be seen in your non-purchase of bitcoin ” way back when”. And that is that since you don’t own any bitcoin, you do not bear the slightest taint of the blood-guilt for all the carbon emissions carried out by the bitcoin miners at their bitcoin mines on behalf of everyone who owns bitcoin.

      Reply
  7. NotTimothyGeithner

    Oof. I saw a college perfect game not long after the release of ipads. I missed the first two top of the innings, so when the game was done i asked an old dude about the beginning of the game and he showed me the scorebox on an iPad.

    Reply
  8. Anon

    The interesting part to me was always its philosophical implications, which predate the financial applications. The entire saga has been like live action Science Fiction. Not that it was ever a sound financial instrument, but it is an interesting experiment, which wound up enabling the worst of us as these things usually do, but there are people in the space thinking beyond how to ‘grow a bag’. The exit of institutional finance may trigger an evolution, that starts rewarding functionality and usefulness, over speculation.

    Reply

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