Genesis on the verge of collapse – Grayscale Bitcoin Trust next?

Key Takeaways:

  • Genesis on the brink of collapse.
  • the lending company was an authorized participant in GBTC creation.
  • Grayscale Bitcoin Fund could follow the sister company.
Genesis on the verge of collapse - Grayscale Bitcoin Trust next?

YEREVAN (CoinChapter.com) – Crypto lender Genesis might be on the verge of insolvency. As CoinChapter reported on Nov 17, the company sought a $1 billion emergency loan. In addition, it halted customer withdrawals on its platform, citing a “liquidity crunch due to certain illiquid assets on its balance sheet.”

The firm became the latest victim of the “unprecedented market turmoil” caused by the FTX contagion wave. The Genesis team pinned the problem on the “abnormal withdrawal requests, which have exceeded [they’re] current liquidity.”

However, the contagion goes deeper than just Genesis alone and threatens to take down the largest Bitcoin Trust belonging to Grayscale, which contains close to 670,000 BTC.

Genesis and Grayscale -DCG

In detail, Grayscale and Genesis, CoinDesk, Foundry, and crypto investment app Luno, belong to the same company – Digital Currency Group (DCG). As CoinChapter mentioned in the previous Genesis review, Jason Yanowitz, the founder of financial media outlet Blockworks, asserted that the Genesis collapse could exacerbate the FTX contagion and collapse a big chunk of the market.

If you’re a CeFi platform that offers yield, you probably use Genesis. Here’s how it works. You give your crypto to Gemini → Gemini gives your crypto to Genesis → Genesis lends your crypto to a fund → the fund borrows from Genesis X+2% → Genesis gives Gemini X+1% → Gemini gives you X%..

said Yanowitz

Meanwhile, the contagion hurts not only any “CeFi platform that offers yield” but threatens to take down the largest Bitcoin Fund on the market.

Analysts Gautam Chhugani and Manas Agrawal noted, “GBTC’s trust structure protects its holders and remains ring-fenced from failures within DCG or DCG group entities.” However, research from the analytical platform Data Finnovation, published in July 2022, might prove them wrong.

But before jumping to that conclusion, there are several key things to note about the relationship between Bitcoin and the Grayscale fund token GBTC.

GBTC vs. BTC

As of Nov 22, Grayscale has $10.5 billion in assets under management and hit a record high 45.2% discount for GBTC, according to data from Ycharts. Grayscale currently holds approximately $12 worth of Bitcoins per share in their treasury. However, stock market traders can buy the same Bitcoin-backed GBTC share for $8.28, or 45.2% less than the Grayscale holding price per share.

GBTC vs. BTC

The Discounted GBTC is typical for bear markets. I.e., when enough traders sell their GBTC, the stock’s actual value is less than the Bitcoin Grayscale has in its GBTC Trust. The persistent discount means that traders cannot arbitrage their price against that of Bitcoin.

Grayscale arbitrage trades fall apart.

While the market was bullish, Grayscale provided an instrumental way for various funds to scoop profits. The arbitrage trade in question works in the following pattern:

Accredited investors, such as hedge funds, borrow Bitcoin from Grayscale and purchase GBTC shares. These purchased shares fall under a six-month lock-up, meaning said investors cannot sell GBTC for six months.

When the lock-up expires, they sell the shares on the secondary market to retail investors, usually for a premium. The funds bought BTC at a lower price than GBTC and used the proceeds to pay back Grayscale for the borrowed coins, pocketing the difference. 

The pattern worked successfully while the market was bullish. I.e., when GBTC is trading at a premium, you can create shares with Bitcoin rather than US dollars and make money. When it is trading at a discount, you can’t do that anymore.

As a result, the said funds have an excess of discounted GBTC and BTC loans to replay. Meanwhile, the alpha crypto saw a 70% year-to-date depreciation and stood at $15,700 on Nov 22.

Did Genesis create GBTC shares?

According to the mentioned research by Data Finnovation, DCG has been buying shares of Grayscale’s Bitcoin trust for some time.

DCG bought 15 million shares between March 2021 and Jan 2022. And then about 3 million more between February and March 2022. Also during this time period the GBTC price went from a premium to a discount.

researchers say.

Furthermore, Genesis also created GBTC shares according to the pattern presented above. The company’s quarterly reports presented in the research suggest that Genesis was lending people BTC to create GBTC. To prove their point further, the article presents a passage from Genesis’s Q1 2021 report:

Genesis created GBTC shares?

This is just a straight-up admission that Genesis lends people BTC to create GBTC shares. Genesis is the “Authorized Participant” to create GBTC. Go ahead and check. The agreement is here. The trust’s SEC filings — there are a lot of them — are here.

read the report.

Thus, the two companies are more involved than investors would like to believe. DCG officials denied any possibility for Grayscale Bitcoin Fund to crash. They also asserted that in case of a collapse would prefer to hold onto Grayscale over Genesis. The fund is DCG’s “flagship business and its cash cow,” generating around $300 million in yearly fees.

Also read: Crypto Exchange FTX Owes Top 50 Creditors Over $3B

However, should Grayscale follow Genesis, the crypto market might experience a real ‘earthquake,’ as the Bitcoin fund holds over $10 billion in BTC, not to mention alternative funds in Ethereum and other leading digital assets.

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