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Tag: Insolvency

  • Genesis Trading Insolvency Could Trigger a Bitcoin Collapse

    Genesis Trading Insolvency Could Trigger a Bitcoin Collapse

    What’s Happening with Genesis Trading?

    Genesis Trading is one of the world’s largest crypto trading desks for professional investors, primarily offering Bitcoin over-the-counter (OTC) trades and lending services. Recently, Genesis has temporarily suspended redemptions and new loan originations due to abnormal withdrawal requests in the aftermath of the collapse of FTX.

    Genesis stated that the withdrawal requests have exceeded its current liquidity, which raised concerns about the firm going insolvent. Because Genesis is directly affiliated with some of the largest crypto institutions, its fall could start another domino effect that is even more devastating than the FTX contagion.

    In case you are out of the loop, we have covered the entire timeline of the FTX contagion in chronological order listed down below:

    Fallback of Genesis Trading from Three Arrows Capital

    The lack of liquidity Genesis is undergoing is not only because of FTX. It is largely attributed to the fall of Three Arrows Capital (3AC) in the aftermath of the Terra Luna collapse.

    Genesis was the biggest creditor to 3AC, lending $2.4 billion. After 3AC went bankrupt, Genesis filed a $1.2 billion claim against them. When 3AC failed to provide the required collateral, the parent company of Genesis, Digital Currency Group (DCG), stepped in and assumed the $1.2 billion claim, leaving Genesis with no outstanding liabilities to 3AC.

    By Q3 2022, their market activity drastically fell, with loan originations falling from $50 billion in Q4 2021 to a mere $8.4 billion. Despite the situation, institutional investors still believe they were crypto’s safest counter-party.

    Gemini’s Exposure to Genesis Trading

    Gemini, one of the top crypto exchanges regulated in the U.S., announced that there would be withdrawal delays with its Earn product, in which Genesis is a lending partner. If you do not know how Genesis ties into Gemini Earn, here’s how it basically works:

    After the lenders give their crypto to Gemini, it will be given to Genesis for them to lend out to a fund. The borrowing party will pay fees for this, which will be shared between Gemini and the lenders. The problem now is that Genesis is having liquidity issues, thus they are unable to give Gemini back their crypto. This means that lenders on Gemini Earn cannot get their crypto back.

    Although Gemini assures this does not impact any other products and services, Gemini customers are rushing to get their funds out fearing the exchange is next to go down as the FTX contagion spreads. Over the past 24 hours at the time of writing, Gemini has seen $570 million in withdrawals and ETH withdrawals reached an all-time high on the exchange.

    Genesis Trading’s Impact on the Crypto Market

    It is not just Gemini but also many other CeFi platforms and major hedge funds use Genesis for their yield product. Moreover, many crypto whales opt to give their funds directly to Genesis to earn yields as well as custodial services. If Genesis is unable to give them back their crypto, many lenders worldwide could potentially lose their asset.

    Genesis is also a sister company of Grayscale, the world’s largest Bitcoin fund (GBTC) and one of the largest Bitcoin holders worth $11 billion at the time of writing. If Grayscale is affected by this, there is a possibility that Grayscale will dissolve GBTC to pay back lenders. This impact of this could be huge.

    However, Grayscale assured users that Genesis is not a counterparty or service provider for any Grayscale product, which means they will not be affected by Genesis suspending withdrawals. But in light of recent situations where FTX and Alameda claimed that they are two independent entities, sceptics are demanding a full audit to prove customer funds are safe.

    Genesis Trading Lays Off 30% of Workforce

    On 5th January 2023, Genesis Trading announced a large-scale layoff in order to reduce cost. According to sources close to the matter quoted by Coindesk, 30% of its workforce were cut, which especially affected the sales and business development departments. In addition to Genesis previously slashing 20% of its workforce in August, the company now has around 145 employees.

    The layoff follows shortly after Genesis Interim CEO Derar Islim sent a letter to clients on January 4, addressing the fact that the firm needs more time to sort out its financial issues. However, time is not something Genesis can afford as it faces increasing pressure from creditors.

    Genesis currently owes $900 million to Gemini, and is due to come up with a solution by 8th January 2023. Gemini co-founder Cameron Winklevoss believes that DCG is to blame and should be held responsible for its subsidiary company’s situation. In an open letter to DCG CEO Barry Silbert, Winklevoss accused him of “bad faith stall tactics” and claimed that a $1.675 billion loan from Genesis to DCG is the reason why Genesis is facing liquidity issues.

    Genesis Trading Considers Bankruptcy

    According to Wall Street Journal, Genesis hired investment bank Moelis & Company to review Chapter 11 bankruptcy filings. A Genesis spokesperson explained that it is to “preserve customer assets and drive the business forward.”

    As of 19th January 2023, Genesis is laying the groundwork for a bankruptcy filing, according to Bloomberg. Reports indicated that Genesis is in confidential negotiations with various creditor groups in an attempt to raise cash. However, if Genesis fails to raise capital, it is highly likely they will file for bankruptcy.

    Digital Currency Group (DCG) Under Severe Pressure Amid Genesis Crisis

    On 17th January 2023, DCG halted dividend payments to preserve cash. According to a letter to DCG shareholders reported by Bloomberg, DCG is focusing on strengthening their balance sheet by reducing operating expenses and preserving liquidity. As the parent company of Genesis, this move is most likely the result of the financial crisis Genesis is facing.

    Moreover, CoinDesk, whose parent company is DCG, is hiring advisors at investment bank Lazard to explore options for a potential sale, including a partial or full sale of the company. According to Wall Street Journal, CoinDesk has actually been privately seeking a deal for months, and has received numerous offers. Whether this is related to the Genesis and DCG crisis, no parties have responded to requests for comment.

    CONFIRMED: Genesis Trading Filed for Chapter 11 Bankruptcy Protection

    According to latest news by CNBC, Genesis Trading filed for Chapter 11 bankruptcy protection late Thursday night in Manhattan federal court. Over 100,000 creditors were listed in the company’s bankruptcy filing, with aggregate liabilities ranging from a whopping $1.2 billion to $11 billion.

    In its filing, Genesis stated that it anticipates that after the restructuring process, there will be funds available to pay off unsecured creditors – a group that can be completely eliminated in bankruptcy cases if the circumstances are particularly dire. They also noted the bankruptcy only affects its lending business, and that its derivatives and spot trading business will continue unhindered.

  • SBF vs CZ War: What’s Happening with FTX and Binance?

    SBF vs CZ War: What’s Happening with FTX and Binance?

    Binance CEO Changpeng Zhao (CZ) and FTX CEO Sam Bankman-Fried (SBF), two of the most powerful men in the crypto industry, have been going toe to toe with each other on Twitter. But this fight is much bigger than both of them, as FUDs and controversies surrounding SBF and FTX could potentially impact the crypto industry. In this article, we will break down the core timeline of the feud and explain how its outcome could affect every investor in the crypto space.

    For the latest update. Check out our latest video- IT’S OVER: Binance to Acquire FTX

    IT’S OVER: Binance to Acquire FTX

    Alameda Research Reportedly Insolvent

    The current drama surrounding CZ and SBF began when the balance sheet of Alameda Research, the sister quantitative trading firm of FTX, was leaked. According to a private document CoinDesk reviewed, out of $14.6 billion in total assets of Alameda, $3.66 billion is in FTT, FTX’s native token, and $2.16 billion in FTT collateral. Other significant assets also include $3.37 billion of crypto tokens connected to SBF in one form or another including Solana (SOL), Serum (SRM), and more.

    This is a big red flag as it indicates that the majority of Alameda’s net equity is FTX’s own centrally controlled token printed out of thin air, making it completely illiquid. Let’s look at it this way: the current market cap of FTT is $2.3 billion and Alameda’s numbers show an excess of nearly 200% of the total circulating supply of FTT. This means that Alameda’s assets cannot be sold without severely impacting the market.

    Many crypto experts drew parallels from Celsius Network’s collapse as Alameda is following the same model, leading to widespread rumors of Alameda going insolvent.

    CEO of Alameda Research Caroline Ellison asserted on Twitter that the balance sheet only reflects a few of their biggest long positions, and the company actually has over $10 billion in assets that are not included in the balance sheet. However, this does not address the issue that Alameda is holding $5 billion worth of “magic money” reported on their balance sheet.

    Binance Liquidates Its Entire FTT Holdings

    Shortly after the leak, CZ posted a Twitter thread announcing Binance’s full exit from its FTT holdings. But they will do so in a way that minimizes market impact, selling it on the open market at monthly intervals. CZ fired shots at SBF stating that liquidating their FTT is a post-exit risk management, learning from the Terra Luna collapse. This implicated that FTX could potentially repeat history, heading into a death spiral if a bank run were to happen.

    Shortly after, Ellison responded to CZ that Alameda was willing to buy all of Binance’s FTT holdings at $22. Several members of the crypto community believed that the response seemed desperate and was a buyback red flag. CZ eventually declined the bid, and further added that he will not support “people who lobby against other industry players behind their backs.” This is in reference to SBF allegedly supporting the DCCPA draft bill last month that could pose significant threats to DeFi.

    If SBF’s alleged political stance is the match and Alameda’s balance sheet is gasoline, then CZ liquidating its entire FTT holdings is striking the match.

    This series of events sparked a lot of FUD in the crypto community, resulting in staggering outflows as people were rushing to withdraw funds from FTX, with stablecoin outflows from FTX reaching $451 million according to Nansen data. Reports also show a 4-8 hour delay and increased fees in FTX withdrawals, upsetting many FTX users. At the time of writing, FTT token has dropped 39% from its weekly high.

    Sam Bankman-Fried’s Response to Insolvency Rumors

    SBF recently issued a response (update: Tweet deleted) assuring people that FTX and its assets are fine. He explains that FTX has enough capital to cover all client holdings and is processing all withdrawals. In response to the cause of the overall situation, SBF stated that a competitor is targeting them with false rumors, throwing shade at CZ. Ironically, at the end of SBF’s Twitter thread, he calls for collaboration with CZ for the ecosystem.

    Though as calm as SBF is handling the situation, it does not address the issue that Alameda is holding $5 billion worth of FTT tokens printed out of thin air, the very same model that led to the collapse of Celsius. It is impossible to sell an illiquid asset without severely impacting the market. But at the end of the day, FTX is a highly reputable organization with a lot of resources and manpower.

    Larry Cermak, Vice President of Research at The Block, believes that FTX and Alameda has the size to weather through the storm, and that FTX going insolvent is near 0%. He also mentioned however that it is clear there are liquidity issues with FTX currently. Other crypto experts also agreed but also advised investors to treat the situation with caution.

    SBF vs CZ: Who won the war?

    CZ emerges as the clear winner in the war between SBF vs CZ. SBF indirectly admitted defeat on 9th November 2022 when he announced that he agreed to a “strategic transaction with Binance for FTX.com”. This, agreement, however, fell through as detailed in our article- Binance will NOT acquire FTX: What is next?

    The SBF vs CZ war finally ended with CZ coming out victorious on 11th November 2022, when SBF announced he had filed FTX, FTX US, and Alameda for voluntary Chapter 11 bankruptcy in the US.

    Now with FTX exchange out of the picture, CZ’s Binance exchange comes out top. Binance now has the highest 24-hour trading volume and page visits out of all the centralized cryptocurrency exchanges according to CoinGecko.

    Top cryptocurrency exchanges ranking (Source: CoinGecko)
  • Binance to Acquire FTX: What This Means for All Investors

    Binance to Acquire FTX: What This Means for All Investors

    On 8th November 2022, Binance CEO Changpeng Zhao (CZ) announced on Twitter that Binance intends to fully acquire FTX to help cover their liquidity crunch after FTX CEO Sam Bankman-Fried (SBF) reached out to Binance for help. In case you are out of the loop, our previous article “SBF vs CZ War” covers the core timeline of what has been happening that led to this acquisition.

    In this article, we will break down the acquisition events as it unfolds and explain how this will affect every investor in the crypto space. You can also check out our latest video — FTX Collapsing: Biggest Disaster in Crypto? for more insight.

    FTX Halts Withdrawals due to Liquidity Crunch

    According to a report by Reuters, SBF sent an internal message on Tuesday morning to company employees stating that around $6 billion had been withdrawn out of FTX. Given the situation, FTX had no choice but to halt all crypto withdrawals due to lack of liquidity, which confirmed insolvency rumors about FTX.

    Since the liquidity of FTX and Alameda Research are mostly held in illiquid FTT (FTX native token) instead of liquid cash, there was no way for FTX users to cash out their funds. Moreover, no strategic investors and partners of FTX were able to help cover their billions of dollars in debt. As a last resort, SBF turned to none other than CZ who has more than enough resources and manpower to rescue him.

    Binance to Acquire FTX

    Hours after the withdrawal suspension, CZ announced on Twitter that Binance signed a non-binding Letter of Intent (LOI), intending to fully acquire FTX and help cover the liquidity crunch to protect users. For the time being, Binance is conducting a full Demand Draft (DD) in which they are assessing the situation about the acquisition.

    However, keep in mind that the LOI is non-binding, which means Binance has the discretion to pull out from the deal at any time. But if it goes through, FTX will be officially owned by Binance, possibly marking it the biggest moment in crypto history.

    On the withdrawal end, Binance has helped FTX on clearing out withdrawal backlogs. According to a Tweet by SBF, this will clear out liquidity crunches and all assets will be covered 1:1. However, some users are still experiencing withdrawal delays as shown by the comments under the Tweet.

    What will Happen to FTX Users after Binance Acquisition?

    Although this may seem like a big move for Binance, the outcome created a ripple effect that could potentially affect every investor in the crypto space. Good or not, only time will tell.

    Binance May Damage the Long-Term Interests of Crypto

    As we have learned from FTX’s downfall as well as Terra Luna’s collapse, one thing is for certain in the crypto space: nothing is certain. No one saw it coming. The same could be said about Binance as well. (https://www.blazeair.com/) That is not to say that Binance is next, but the possibility is never zero.

    After all, despite Binance being a highly reputable crypto exchange and CZ’s passion and commitment to building a truly decentralized ecosystem, it is a centralized business at the end of the day. With FTX out of the equation, Binance will be the undisputed powerhouse in the crypto industry, which goes against the idea of decentralization, the core pillar of crypto. If Binance falls, the crypto market goes back to the dark ages. Gracey Chen, Managing Director of Bitget, said on Twitter that Binance’s acquisition of FTX harms decentralization and could damage the long-term interests of the industry.

    Nevertheless, CZ assures the public that the business model of Binance is aligned with decentralization and puts user security first. He asserted that Binance has never used BNB as collateral for loans and has never taken on debt. He also added that all crypto exchanges should incorporate merkle-tree proof-of-reserves, since fractional reserves only work for banks and not crypto exchanges. This reflects CZ’s proactiveness in building a more secure and decentralized ecosystem.

    Increased Scrutiny and Regulations on Crypto Exchanges

    Binance’s acquisition of FTX has definitely raised major concerns for government authorities. Several CEOs of other major crypto exchanges such as Jesse Powell (Kraken), Brian Armstrong (Coinbase), Jeremy Allaire (Circle), and Kris Marszalek (Crypto.com) expressed on Twitter that government authorities might step in next to enforce more heavy-handed regulations.

    Although strict regulations could stabilize the market and protect user funds, it also limits digital freedom for retail investors as the whole point of crypto is trustless transactions without central authorities. It is basically a dilemma: too much involvement from the government defeats the purpose of the crypto space, too little breeds unregulated securities and malicious actors.