The Contagion Continues: Major Crypto Lender Genesis Is Next On The Chopping Block

Genesis needs $1 billion liquidity injection by Monday, won't come from parent company DCG. Gemini sees major bitcoin outflows. Silvergate on the ropes as investors fear potential bank run.

Relevant Past Articles: 

• The Bigger They Are…

• The Exchange War: Binance Smells Blood As FTX/Alameda Rumors Mount

• Counterparty Risk Happens Fast

• The Crypto Contagion Intensifies: Who Else Is Swimming Naked?

Genesis Looks For Liquidity Injection 

If you don’t know about Genesis Trading perhaps you should. They represent the backbone infrastructure of the institutional investor base in the bitcoin and broader crypto markets. For lending, trading, hedging, exchange yields and more, Genesis Trading was the brokerage to facilitate all of this activity in the space. Remember those juicy yields from the BlockFi and Gemini Earn products in the space? Genesis is the middleman between those platforms and hedge funds to generate that yield. 

Just yesterday, Genesis held a short client call to announce the suspension of redemptions, withdrawals and new loan originations. With exposure to FTX and Alameda Research, the company now needs another liquidity injection after having nearly $175 million locked in a trading account with FTX. As an initial response, parent company Digital Currency Group (DCG, the parent company of Grayscale), injected $140 million into the business to keep operations running smoothly. Yet, Genesis is now scrambling to find more capital. It’s the reason Gemini Earn had to halt withdrawals. 

Although Gemini has been vocal that the rest of their operations are working normally, limiting the Gemini Earn product and having service outages across the platform seem to have sparked a small rush to get bitcoin off the exchange: 13% of the total bitcoin balance has left over the last 24 hours. As we’ve highlighted before, exchanges are not the place for your bitcoin, especially when there’s a high probability that there is another exchange (or even multiple) left to fall. 

To give you an idea of size, Genesis had $50 billion in loan originations in one quarter and a $12.5 billion active loan book at the peak of the market back in 2021. Yet, loan originations and the active loan book both took a hefty haircut, falling to $8.4 billion and $2.8 billion respectively, as of the third quarter of this year.

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Back in July, Genesis filed a $1.2 billion claim against Three Arrows Capital that was picked up by DCG to keep the hit off Genesis’ books. Loans were partially collateralized with shares of GBTC, ETHE, AVAX and NEAR tokens. 

Source: Genesis Quarterly Report 

We know from on-chain activity that Genesis had tons of interactions with Alameda, Gemini and BlockFi through their OTC trading desk; FTT was also a top token received and sent in that activity. Without Genesis sharing more details, we don’t know the extent of the exposure and capital needed to make customers whole. Yet, the fact that the parent company DCG hasn’t already stepped in to provide another liquidity injection is a warning sign on where this might end up. Just today, news surfaced that Genesis is seeking a $1 billion credit facility immediately. Not good.

In the worst-case scenario, the lack of funding supplied by DCG could spark questions around accessible liquid assets. DCG and Grayscale have dissolved trusts before and that option is not off the table.