What’s Happening to Genesis?
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Genesis Global Capital is in a bit of a rough patch. The crypto lender stopped withdrawals off the platform a few days ago amidst fallout from the FTX crash.
This announcement has sent shockwaves through the cryptocurrency industry as many fear that the fallout from the collapse of FTX will spread to other players in the industry.
You likely have never even heard of Genesis Global Capital. The largest crypto lender does not actually lend to retail investors. Instead, Genesis lends crypto to institutions like hedge funds and asset management firms. This is a little concerning as the fallout from the collapse of Genesis can cause cryptocurrency to further spiral.
This article will cover absolutely everything you need to know about Genesis Global Capital and the impact their collapse could have on the greater cryptocurrency industry.
What is Genesis Global Capital?
Genesis Global Capital is the lending arm of the Digital Currency Group. Digital Currency Group is a venture capital firm that owns a few different subsidiaries that operate within the cryptocurrency. These subsidiaries include CoinDesk, Luno, Grayscale Investments, Foundry, and Genesis Global Capital.
As mentioned earlier, Genesis lends cryptocurrency to institutions. This is a perfectly fine business model, but the two largest borrowers from Genesis are Alameda Research and Three Arrows Capital (3AC). Alameda Research is the crypto trading firm owned by Sam Bankman-Fried and that currently has a few billion dollar hole in its balance sheet. 3AC was a Singapore based hedge fund that went bankrupt earlier in 2022.
What Happened to Genesis Global Capital?
Genesis had lent 3AC 2.3 billion dollars before they collapsed, which obviously left them with a massive hole in their balance sheet. They had also lost around 100 million dollars when a Hong Kong crypto lender, Babel Finance, collapsed around the same time as 3AC.
This was concerning, but Digital Currency Group was able to bailout Genesis. The CEO at the time, Michael Moro, was fired. Genesis moved on from this and seemed mostly alright for the next few months.
Things started to unravel, however, when FTX collapsed. The FTX collapse caused a panic that resulted in customers wanting to withdraw their money. The problem was that Genesis did not have the liquidity to cover customer withdrawal requests. This caused them to halt customer withdrawals on November 16, 2022. A week prior they stated they had approximately $175 million on FTX after previously stating they had “no material net credit exposure.”
The day after halting withdrawals Genesis stated they needed 1 billion dollars to fill the hole in their balance sheet. They attempted to raise $1 billion from investors via emergency loans to fill that hole. A few days later (November 21, 2022) they stated they would declare bankruptcy if they did not receive the $1 billion.
It’s important to note that Genesis is not being entirely clear in their statements and appears to have lied on their Twitter account. They first stated they had “no material net credit exposure” and then said they had $7 million in losses and then that they have $175 million stuck on FTX.
“No material net credit exposure” to “we have $175 million on a bankrupt exchange” is a big change for three days. In fact, rumors have began to circulate that Genesis loaned money to FTX and Alameda Research and received FTX Token (FTT) as collateral.
That’s not good because the price of FTT has collapsed by over 90% since that loan was issued (Source: World Coin Stats).
What’s the Future of Genesis Global Capital?
All signs point to Genesis declaring bankruptcy within the next few weeks. They have stated they have no imminent plans to declare bankruptcy, but that seems extremely optimistic at this point.
Remember, they went from “no material net credit exposure” to having $175 million on FTX and then asking investors for $1 billion. They also asked Binance to buy them out, but CZ refused the offer.
It seems highly unlikely that anyone will give them the necessary money to cover customer withdraws, which means they will almost certainly have to declare bankruptcy. This does not directly impact retail investors because Genesis did not lend to retail investors. However, they did loan crypto to lots of different exchanges and retail lending operations. The impact on the greater crypto industry will likely be huge as a result of this collapse.
Specifically, Gemini Earn used Genesis as their lending partner. They have already stopped customer withdrawals due to the issues at Genesis. It’s unlikely that this will impact the Gemini cryptocurrency exchange, but anything can happen in this environment. It’s also somewhat reassuring that the owners of Gemini, the Winklevoss twins, have billions of dollars worth of Bitcoin. They could likely bail themselves out if the exchange collapses.
Anyway, many of the centralized finance lenders used Genesis as their lending partner, so it’s expected that more centralized finance crypto lenders will collapse in the coming months. Additionally, the price of Bitcoin has also collapsed and will likely continue to collapse until the panic wanes.
Why Are All These Crypto Companies Collapsing?
Luna, Celsius, Voyager, FTX, and Three Arrows Capital are just some of the crypto companies that have collapsed in 2022. 2022 has been an absolute bloodbath for cryptocurrency, but why is everything collapsing?
What it basically comes down to is all these companies are essentially creating money out of thin air. This works for some time, but it all collapses eventually. It just takes one domino for the whole thing to collapse. The domino in this case was the collapse of Terra Luna, which caused Three Arrows Capital to fold and tanked the price of Bitcoin. It also greatly reduced the trust in the cryptocurrency industry, which caused an influx of investors wanting to withdraw funds off centralized exchanges. That massive run caused the collapse of Celsius and Voyager.
The collapse of FTX was not as closely related, but researchers have discovered that they had close ties to Terra Luna and likely used FTT as collateral to secure loans to cover any loses from the collapse of Terra Luna.
To summarize, Genesis loaned a lot of money and crypto to FTX and Three Arrows Capital. The bankruptcy of both those companies left a massive hole in Genesis’ balance sheet that will almost certainly result in the largest crypto lender declaring bankruptcy. The collapse of Genesis will have a severe impact on the rest of the industry as many exchanges and lenders had funds on Genesis and can now longer withdraw them.