Bitcoin, after months of laggard movements downward, has seen a notable rally. The largest cryptocurrency by market value is now trading above $20,000. This is significant not only because it's the first meaningful jump since the collapse of the FTX exchange, but also because bitcoin has appreciated by enough to put many crypto mining companies and token holders in profit, according to a Glassnode report.
“Many of these models tend to act as significant psychological resistance levels during bear markets, which makes this particular event noteworthy,” Glassnode analysts wrote. The rally – which began last week and accelerated over the weekend – could be attributed to signs of cooling U.S. inflation. With the price above $19,000, Glassnode estimates miners could now earn more mining bitcoin than it costs to run their energy-intensive machines. Further, the average holder bought into BTC at a lower price – meaning they could sell for a profit.
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While this sounds like good news all around, there are still material risks hanging above the crypto industry making a sustained rally, or a return to better days, unlikely. In particular is whether the rally has done anything to improve the situation for crypto’s Sword of Damocles, the unfinished business between conglomerate Digital Currency Group (DCG) and exchange Gemini.
For months, the two firms, both founded by bitcoin OGs, have been embroiled in a dispute related to a loan Gemini made to DCG subsidiary Genesis. The Winklevoss-founded exchange loaned upward of $900 million worth of their customers’ assets to Genesis, which it hired as its principle partner to earn yield for the Gemini Earn lending program. Gemini froze withdrawals from Earn the same day Genesis paused withdrawals.
Since then Gemini co-founder Cameron Winklevoss has issued a series of increasingly heated statements – at first accusing Silbert of using “stall tactics” and now calling for Silbert’s ouster. Commentators have noted the usually talkative Silbert seems to be punting on taking deliberate action (at least in public). Silbert claims Genesis has offered its creditors (including Gemini) deals, with at least one firm outright rejecting DCG's offer to pay back a portion of Genesis' debt.
In December, the interim CEO of Genesis, Derar Islim, told clients that “it will take additional weeks rather than days for us to arrive at a path forward.” It’s unclear exactly what more time will bring at this point, though Silbert was reportedly in the market to raise emergency capital. In the meantime, both DCG and Genesis are tightening their belts with rounds of layoffs. Last week DCG shut down its wealth management unit HQ, and it still has plenty of investments to offload and subsidiaries to jettison (all kidding aside, those subsidiaries include CoinDesk).
Discussing the worst-case scenario of how things could shake out, researchers at Arcane Capital wrote DCG may be forced to “into selling its sizable positions in GBTC,” the Grayscale Bitcoin Trust that holds some 635,000 BTC, “and unknown positions in ETHE and other Grayscale trusts.” Other scenarios include Genesis or – the nuclear option, if everything goes wrong – DCG filing for bankruptcy protection.
It’s unclear how bad things will get, however. Genesis, according to Silbert, is facing a liquidity issue but is not insolvent. Putting aside the $175 million Genesis lost in an FTX trading account, the lending company’s real problems stem from the early days of the crypto contagion, when one of its largest clients, the now-defunct hedge fund Three Arrows Capital (3AC), filed for bankruptcy. Genesis filed a $1.2 billion claim against 3AC, and may have loaned the hedge fund upwards of $2.36 billion, according to a court filing. It’s likely to get a fraction of that back in the 3AC bankruptcy process.
At the time, Digital Currency Group assumed Genesis’ entire billion-dollar claim, leaving Genesis with no outstanding liabilities tied to 3AC and allowing the firm to continue functioning. Silbert, who has written quite plainly about this trying time, said DCG did the "take over" because “there was palpable fear in the market of contagion spreading through and devastating the entire industry.” Perhaps it was only delaying the inevitable.
The nature of these intra-company transfers – apart from reportedly being a matter of federal investigation – is a bit of a lexical conundrum. Silbert has emphatically stated DCG has not “borrowed” $1.6 billion from Genesis, an attempt to put the firms at arm’s length. With a bit of rhetorical flair of his own, Cameron Winklevoss claimed this capital was used for DCG stock buybacks and to make “kamikaze” bets in trying to rescue the battered GBTC. Gemini recently terminated its "master loan agreement" with Genesis, which is supposed to force Genesis' hand to repay the outstanding assets that it had in association with the program.
Ultimately, if a deal can’t be worked out the courts will likely have to decide who owes who what – and how heavy a load of Genesis’ estimated $3 billion burden DCG will have to carry. But for now, Genesis and Gemini are on the same side of a federal investigation. Last week, the U.S. Securities and Exchange Commission charged the two companies with raising billions of dollars of assets from hundreds of thousands of investors through Gemini Earn – all without registering the crypto lending product. This probe will likely result in a multicenti-million dollar settlement, not counting the other lawsuits filed against Genesis.
Not to over simplify, but it often seems as if “crypto lending” as a profit-making activity is tied up in the idea that the numbers will go up forever. Gemini Earn offered customers 8% on their deposits – well above what a traditional savings account offers. On a long enough timeline something was bound to break, and that's only more true the more deals are signed, the more backroom handshakes are done. But what comes up must go down, and it seems likely there’s further still to fall.
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