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Genesis Capital became the latest company to get caught up in the cryptocurrency crash, suspending withdrawals yesterday Gemini soon followed suit, suspending withdrawals from its Earn product However, these are all income earning services – unlike FTX The Biggest Offense of FTX has been disguising itself as an exchange while acting as a hedge fund, playing with client assets All income-earning products carry immense risk at the moment, writes our analyst The dominoes continue to fall, triggered by this FTX saga . Leading crypto lender Genesis Capital suspended withdrawals from its lending business yesterday. If there’s one thing crypto investors already know, it’s this: once the fateful decision to suspend withdrawals is made, it’s game over. This is big business. Genesis had $2.8 billion in outstanding loans in the third quarter of 2022, while originating $8.4 billion over the quarter. That’s a big change. In my article last week on what’s next for cryptocurrencies, I talked about inevitable contagion. “Expect some contagion from this as we still don’t know who was exposed to whom – but FTX, as a major player in the industry, will no doubt drag some bodies with them” Well, to quote that catchy Drake song, “the bodies are (beginning) to fall”. It’s not just a matter of if; it’s more a question of who.
Who will go bankrupt next?
Genesis said its decision to suspend lending operations was due to “abnormal withdrawal requests that exceeded our current liquidity”. Yes, I bet. The ecosystem is – and will continue to be – tested to the limit. Let’s continue to look at Gensesis, a key player in the lending market. One partner they have is Gemini, for whom they provide this income earning service. Gemini is an exchange run by everyone’s favorite identical twins, Tyler and Cameron Winklevoss (I wonder if Cameron is annoyed that Tyler is always listed first?), so people were worried. A few hours after the Genesis announcement, Gemini issued a statement saying that withdrawals from its Earn program were suspended. Inevitable. “We are working with the Genesis team to help customers redeem their Earn funds as quickly as possible. We will provide more information in the coming days,” said Gemini.
1/6 We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days. https://t.co/9e48pF3Ymn — Gemini (@Gemini) November 16, 2022
Companies join BlockFi to suspend withdrawals, yet another crypto lender in despair mode after FTX collapse. The company is reportedly ready to lay off workers and declare bankruptcy.
The difference between this and Sam’s products
However, there is a big difference between what is happening at all these companies and what is happening at FTX. Of course, all companies are employing reckless risk management, a complete lack of diversification, and asking for all this chaos. As Sam put it in one of his stream-of-consciousness tweets (which just poured gasoline on that whole fire), “That risk was correlated – with the other guarantee and with the platform. And then came the crash… and at the same time there was a run on the bank.” Which, you know, it shouldn’t exactly take a rocket scientist to figure it out. Cryptography is immensely correlated and extraordinarily volatile. So when you invest in 100% cryptocurrency, it shouldn’t come as a surprise that these red days arrive. That’s exactly what happened with BlockFi, Gemini Earn and all those products. You know – just like Voyager Digital, Celsius and all the other companies that promised customers income in exchange for their assets. By now, people know that these platforms are risky. They know that every penny they put in is vulnerable to a disappearing act. But FTX was not one of those platforms. FTX was an exchange. And tell me this, Sam. How does a non-bank entity experience a bank run? I keep saying that FTX was an exchange because it is vitally important. Customers must deposit money on exchanges, before leaving them there as cash or as a way to buy crypto assets. So when they wanted to withdraw, the coin should just be… there. The exchange must make money from trading fees, deposit fees, whatever. It shouldn’t act like a fractional reserve bank, sending deposits to its sister trading company and then betting with them. Customers might know what was going on at BlockFi and the ilk, but with FTX, they didn’t. And that’s why people are so angry. This is also why it looks like fraud (although I have no idea about the ins and outs of the laws. My gut tells me that Sam was smart enough to avoid direct violations, but who knows).
What happens next?
$8 billion in cash doesn’t disappear into thin air without a few problems. Genesis is great, but there will be more. That’s why I’m surprised that Bitcoin held up relatively well. The pain won’t stop here, as discussed in my article yesterday – not only is this a massive liquidity drain, but Bankman-Fried has had hands in many companies. For anyone still into income products I would be very scared. For me, once Earth collapsed, these platforms presented a risk-reward profile that I simply could no longer justify. Sure, they can say they’re good, but so were the management teams at Celsius, BlockFi, and everyone else. The most important thing to quell a bank run is to keep panic to a minimum – everyone knows that. Is the yield – be it 4%, 5%, 10% – really worth risking all your holdings? This is no longer an upwards-only economy. This is a very real bear market, while within the cryptocurrency space, capital is fleeing out faster than ever before. So let me ask you again. Is this income really worth it?
