Genesis bankruptcy: how it came to be and two further scenarios

Today,  a large American crypto lender named Genesis announced its bankruptcy. It owes only the top 50 creditors $3.6 billion, with a total debt estimate of up to $10 billion. At the same time, the market was quite calm about what happened, understanding that this was only an interim event but not the end of this story. We analyze what it all means in this article.

 

Helicopter view

It so happens that we can understand Genesis’ story only by understanding the previous history of the collapse of other companies. 

In markets, big players are always heavily bonded. Big capital is interconnected by thousands of threads, with many other projects intersecting with their interests. The unexpected collapse of Terra/Luna in 2022 triggered a cascade of bankruptcies, one of which was Three Arrows Capital (3AC), which actively invested in Terra projects. In turn, 3AC raised capital for it from Genesis. It’s called the “domino effect,” where the collapse of the first player in the chain leads to the collapse of all the others.

Genesis was even less fortunate. In addition to actively investing in 3AC, the company also actively invested in FTX, as it seemed to them, reasonably believing that FTX is applicable to the well-known principle in the world of finance — “too big to fail” (incidentally, nowadays, this principle is actively re-interpreted as “too big to jail,” and in this regard, the FTX top management still satisfies it).

#Genesis was an institutional crypto lending platform for other crypto lenders so here are the publicly disclosed Chapter 11 creditors. Expect #Gemini to file Chapter 11 with $765m exposure. Also listed is #Abra $30m & #Ripio $27m. Full disclosure I am a shareholder in Abra. pic.twitter.com/xkFlNaZGrP

— Simon Dixon (@SimonDixonTwitt) January 20, 2023

It turns out that, on the one hand, Genesis received the most powerful hits from two major players at once. On the other hand, the prolonged crypto winter has dried up its remaining reserves. Logically, the company is bleeding out in early 2023, having lost a significant amount of capital. It was doomed to continue the chain of falling dominoes.

It is now clear that the catalyst for the death of Genesis was the Gemini exchange, which invested about a billion dollars in the company. Gemini is desperately trying to get its money back, putting tremendous pressure on the lender and causing Genesis to file for bankruptcy today, putting an end to this long struggle for survival.

"Through this unregistered offering, #Genesis and #Gemini raised billions of dollars' worth of #crypto assets from hundreds of thousands of investors," said SEC. #cryptocurrency https://t.co/rqhO0ZqUlx

— Bitcoin.com News (@BTCTN) January 13, 2023

So in telling the Genesis story, it is important to understand that this is only a link in the chain, in fact, we are examining the diverging circles in the water from the crash in 2022, which are generating more and more negative consequences as early as 2023.

Having seen the big picture, we are ready to dive into the details to answer the most important question, the essence of which can be summed up as “what happens next?” So far, we can clearly see two scenarios, good and bad, for the market.

Favorable scenario

Reading about the smoking ruins of the crypto market, where every month something explodes again and again, readers may get the wrong impression of some kind of doom. No, there are quite respectable winners left in the market, who not only avoided the consequences of the whole chain of collapses but, like predators, are now swirling around numerous victims, choosing better prey.

In our recent article, we looked in detail at the tactics of the two clear winners, Binance and Tron. We also talked in detail about the two super deals they want to make in their operation to take over the U.S. market in 2023.

Let’s not talk about their personal interests now, let’s focus on the interest of a common person in crypto. In particular, Justin Sun (Tron) is going to buy out DCG/Genesis’ troubled assets, thereby stabilizing the situation. The infusion of huge external funding in this deal will finally stop the domino effect, halting the prolonged degradation of the crypto market. 

You don’t have to just imagine Justin Sun as a savior, no, he has his own clear vested interest in buying other people’s assets on the cheap, but the benefit to the market overall of such a scenario is more than obvious — it will cement the market by stopping its self-destruction.

Reuters reported that "Justin Sun plans to invest $1 billion to acquire assets from DCG #Crypto pic.twitter.com/TUYPSKEsHw

— BigBro Sopa (@KrittidetSopa) January 15, 2023

This deal is in the process of complicated negotiations, so we just have to wait for the results. I would like to cool down the optimists because the bigger the deal, the more complicated the conditions it involves (for example, the Genesis bankruptcy that just came up), and the more time it will take to come to an agreement.

Negative scenario

The main vector of attack from Gemini, apparently after the bankruptcy of Genesis, will be directed at Digital Currency Group (DCG), the parent company of embattled crypto lender Genesis. A stream of threats and open letters from Gemini’s management are now addressed to DCG. This is the only entity that can legally be held responsible for Genesis’ problems.

The Digital Currency Group is a much larger entity that includes the famous Grayscale, about the danger of whose problems we wrote in detail earlier. Any attempt to drag DCG into a further chain of lawsuits could end in an incredible collapse of the entire market. Any problems with Grayscale alone would surely surpass the scale of the FTX crash. 

4/n – Barry is desperately trying to save his DCG empire by ring fencing out Genesis and letting it fail. However, creditors are unlikely to let him off the hook, especially since Genesis has fraudulently shown a false balance sheet to people who lent money to them

— degentrading (@degentradingLSD) January 20, 2023

We can see by the recent actions of DCG management that this company is sober about the dangerous situation and is actively preparing for an attack:

• The company has announced new, even bigger layoffs. 
• The company announced the complete closure of its asset management division, HQ Digital.
• DCG is temporarily suspending dividend payments (a rather unusual move for corporate America, which highlights the seriousness of the situation).
• DCG’s Coindesk is also going to be sold “in response to current market conditions.”
• And some other measures, which we will not enumerate.

So, DCG is actively preparing for the fight, accumulating liquidity and aggressively cutting costs. As you can see, the market met the Genesis bankruptcy rather indifferently (it had no effect on prices) because this is only a prelude to the outcome of this story. DCG, as the owner of Genesis, will have to act in the next act of this drama.

6/n – Creditors pursuing DCG will probably look at DCG's stash of GBTC and the mgmt fee share rev of Grayscale. At this point, the hole is so huge that both assets are unlikely to cover the gap. However, the qn remains – when will Barry be forced to sell the GBTC to raise cash?

— degentrading (@degentradingLSD) January 20, 2023

Certainly, the bankruptcy of Genesis will trigger a series of other bankruptcies of smaller players, but that probably doesn’t concern anyone (except their clients). The only question in this scenario is: Who should be the next big falling link in the chain, Gemini or DCG? 

Place your bets, ladies and gentlemen!