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Jan 2023

Genesis bankruptcy might close the loop of centralized finance busts

by Lucas Santana, Research Analyst
4 min read
Jan 24, 2023

Genesis bankruptcy might close the loop of centralized finance busts


 

TL;DR:

  • Genesis Global Holdco, a lending firm affiliated to the Digital Currency Group, filed for Chapter 11 bankruptcy on January 19, 2023.

  • Filings show that the company and its subsidiaries hold more than $150M in cash on hand, with an estimated number of creditors exceeding 100,000 and total liabilities in the range of $1B to $10B.

  • Crypto prices reflect that the announcement has so far been dismissed by crypto investors, with digital assets continuing to rise as one of the best performing asset classes of 2023.

  • If the Genesis bankruptcy proves to be the last major blow-up for this cycle, we might be in for an even stronger foundation for crypto in the coming years, built by responsible companies, blockchain projects with great fundamentals, and a long-term focused investor base.

 


 

After two months following the FTX saga, the latest crypto centralized finance (CeFi) company to go bankrupt is Genesis Global Holdco, a lending firm affiliated to the Digital Currency Group (DCG). Genesis filed for Chapter 11 on late Thursday (January 19) in the Southern District of New York, initiating its restructuring process alongside two of its lending business subsidiaries, Genesis Global Capital and Genesis Asia Pacific. Other subsidiaries involved in the derivatives, spot trading, and custody businesses of Genesis aren’t included in the filing.

As covered in a letter by our CEO in mid November, Genesis halted withdrawals and stopped new loan obligations citing “unprecedented market turmoil” due to the FTX downfall. The following weeks brought severe market speculation on the likely insolvency of DCG’s lending arm, with the company struggling to raise $1 billion to avoid bankruptcy. Now, after two months of increasing fears of contagion to other DCG companies—including asset management firm and sponsor of GBTC, Grayscale—Genesis and its advisors have decided to go through the restructuring process to find the most effective path “to preserve assets and move the business forward.” Filings1 show that the company and its subsidiaries hold more than $150M in cash on hand, which allegedly provides enough liquidity to support ongoing operations and the restructuring process itself. Also, the estimated number of creditors of the three companies exceeds 100,000, with total liabilities in the range of $1 billion to $10 billion.

 

The CeFi ouroboros: From the GBTC trade to the Genesis bankruptcy  

 

The bankruptcy of Genesis might be closing the loop of all major busts we’ve witnessed in CeFi in 2022, a loop that began with the “GBTC trade” to create yield during the most recent bull market. This is because Genesis was a leading lending firm in crypto, acting as one the most important middlemen for “high yield” products in this space. It was used by the likes of Three Arrows Capital, Celsius, and Alameda Research to boost their ability to generate returns in crypto. When the markets decisively turned downwards in the second quarter of 2022, the house of cards of high yield strategies started to crumble, and CeFi players with improper risk practices have come to the realization that “there is no free lunch.” 

Moving forward, it’s important for us to monitor how the US Securities and Exchange Commission (SEC) will respond to the Genesis’ Chapter 11 filing given the fact that the SEC recently charged Genesis and Gemini—a major US-based crypto centralized exchange (CEX)—for the unregistered offer and sale of crypto asset securities through the Gemini Earn lending program, a yield product holding approximately $900M in crypto assets from 340,000 CEX customers

The next several weeks will also show us a clearer picture on whether Genesis and its lending subsidiaries were the only DCG companies in bad shape after 2022’s crypto winter, or if there are still cards to fall. But if the Genesis bankruptcy was indeed the last major blow-up in crypto for this cycle, we may have now come full circle after crypto’s November 2021 all-time-high, with a renewed market in which the responsible players have survived, the good projects have strengthened their technology and overall fundamentals, and investors—both on the retail and the institutional sides—have stayed in this asset class due to the true belief in the potential of blockchain technology. For the time being, the crypto rally since the beginning of the year seems to endorse this idea, with the Nasdaq Crypto Index (NCI) up 35.62% year-to-date,2 and bitcoin’s spot-to-futures volume ratio suggesting that market sentiment of retail investors is steadily shifting. Together with more positive macro signs in the past several months, Genesis bankruptcy might actually be one of the final events leading to a stronger foundation for a new crypto cycle.

As we covered in our Crypto Investment Outlook 2023, the potential of crypto is just too big for investors to keep focusing on short-term high-yield strategies that can’t survive the downturns of assets with 80+% annualized volatility. As Hashdex approaches our fifth year, the Genesis fallout shows yet another demonstration of why our ongoing obsession over risk continues to be the best strategy to follow as we offer investors exposure to this emerging asset class through simple, secure, and regulated products.

 

[1] Original filings can be found at https://restructuring.ra.kroll.com/genesis/.

[2] Source: Nasdaq NCI History, accessed January 23, 2023.

 

 

About Author
Lucas Santana,
Research Analyst
© 2023 Hashdex Asset Management Ltd.
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