History is strikingly similar, as the fallout from the FTX fraud of the century has just come to an end, and a new wave of turmoil has begun between US crypto exchange Gemini and its grayscale parent company, Digital Currency Group (DCG), whose subsidiary, Genesis, could be the first lightning strike in the crypto industry in 2023.
Just as the FTX incident began with a Twitter war between CZ and SBF, the DCG incident began with a Twitter confrontation between Gemini co-founder Cameron Winklevoss and DCG CEO Barry Silbert, who sent an open letter to Silbert on January 2 accusing DCG and its On January 2, Winklevoss sent an open letter to Silbert accusing DCG and its subsidiary Genesis of maliciously owing Gemini customers $900 million, and the crypto market was once again in the gloom. In the face of Gemini's advances, will DCG make the same mistake as FTX? What will be the impact on the crypto industry if DCG crashes?
Genesis is in debt crisis, DCG is responsible
DCG is currently the world's largest venture capital firm, mainly investing in blockchain-related startups. Its famous investments include BitPay, Ripple, Coinbase, etc. Its subsidiaries include Grayscale, the blockchain media Coindesk, and Genesis, the crypto-lending giant that triggered the DCG crisis.
Genesis, one of the world's largest crypto lenders whose main business is market makers and lending, suffered a $175 million hole in the FTX meltdown, which directly led to a suspension of redemptions and new loan originations in its lending arm. According to Coindesk's Morning Edition, Genesis is in addition to the $900 million it previously owed Gemini, which led the exchange to suspend user withdrawals from Gemini Earn in mid-November and has yet to say when it will restart. There is another group of creditors with $900 million in debt, bringing Genesis' total debt to nearly $2 billion as of today.
The $2 billion debt is a projection based on the information Genesis has made public so far, but what is Genesis' actual debt? I'm afraid no one knows for sure. Crypto institutions have long been questioned about their finances due to a lack of regulation, and the last time Genesis announced it lost $175 million in the FTX meltdown, a figure that raised a lot of questions. Faced with such a huge hole, no platform has the ability to help fill it up, so when it was rumored that Genesis was seeking a takeover by Binance, it was immediately denied by Binance, which said that part of Genesis' business would conflict with its future revenue. It is worth noting that when crypto exchange FTX sought a takeover by Binance previously, Binance gave the same reason as Genesis, and then FTX declared bankruptcy.
Gemini, the biggest victim of this incident, has clearly been pushed to the brink of desperation, otherwise it would not have chosen to publicly confront DCG by tearing its face off, as Gemini is a Crypto exchange and custodian that allows users to buy, sell and store digital assets, while Gemini Earn is a high-yield savings product created by Gemini for its users, offering customers After Gemini takes in user funds, it makes them available to partner Genesis to operate in order to achieve a high APR return.
Genesis, after receiving funds from Gemini, will invest some of the funds in projects within its parent company, DCG, in order to earn a higher rate of return, and Genesis reportedly has $2.8 billion in outstanding loans on its books as of today, including its parent company, DCG, which is responsible for Genesis' debt crisis. DCG is also responsible for Genesis' debt crisis.
The cooperation between Genesis and Gemini was relatively smooth until the FTX incident, which led to a liquidity crisis that caused Genesis to be unable to withdraw its funds, and since most of the funds lent to Genesis by Gemini came from the funds of users on Gemini Earn, after the FTX incident and the suspension of Genesis' withdrawals, a large number of users began to flock to Gemini. As a result of the FTX incident and Genesis' suspension of withdrawals, a large number of users began to flock to Gemini Earn to withdraw their funds, which directly led to a cash crunch and eventually forced Gemini to announce the suspension of withdrawals, and as of today, 340,000 users on Gemini Earn have been unable to withdraw their funds.
Gemini was under a lot of pressure due to the anger of customers who could not withdraw their money and the lawsuit. After six weeks of unsuccessful recovery, Gemini had to issue an ultimatum to DCG, which led to the news article "Full text of Gemini's open letter to DCG: demand for repayment of $900 million". Winklevoss has asked Silbert to publicly commit to working together to resolve the issue by January 8, 2023.
It is widely believed that if DCG does not come up with a satisfactory solution by January 8, then Gemini may force Genesis into bankruptcy, which would obviously be a severe blow to DCG. Because once Genesis enters bankruptcy, it would trigger the liquidation of DCG's assets (based on redeemable loans), DCG would be at risk of bankruptcy, and its subsidiary, Grayscale Trust, would be at significant risk.
To save or not to save DCG is a huge dilemma
Last year, FTX was forced to file for bankruptcy protection due to its inability to pay its debts, and its founder SBF was arrested. The first option is to help Genesis repay the $900 million debt owed to Gemini; the second option is to clear the relationship with its subsidiary Genesis and let Genesis bear the debt itself. The consequences of either choice would be too much for DCG to bear at this time.
The first option would mean that DCG would have to take on an additional $900 million in debt, which would certainly add to DCG's already liquidity crisis, as DCG itself has an excessive amount of debt, having helped its subsidiary Genesis assume the debt associated with the 3AC default back in August 2022, a debt of approximately $1.1 billion that has now been converted to DCG's debt. DCG is actively involved in the liquidation process of 3AC and is seeking all available remedies to recover its assets, but time is running out for DCG to raise capital in the face of Genesis's aggressive approach. In addition to the loan and long-term promissory note with Genesis, DCG has its own $350 million credit facility from a small group of creditors led by Eldridge, according to DCG's financial results.
DCG's largest asset holdings are currently 630,000 bitcoins, which, at the current market price of $16,500 per bitcoin, would total about $10.4 billion, but those 630,000 bitcoins are both DCG's assets and liabilities. Because these bitcoins were held by DCG through GBTC, which was worth more than $20 billion at the time, but has now shrunk by nearly half, it looks like it has 630,000 bitcoins, but in fact it has lost more than $10 billion on this holding alone, so how can it help its subsidiary Genesis pay off Gemini? Gabor Gurbacs, director of digital asset strategy at New York-based investment management firm VanEck, offers his own advice on this: "In my personal opinion, the solution is for DCG to raise money by selling its equity and allowing Genesis creditors to be repaid, which is an honest and smart approach." Selling equity is probably the most appropriate option for DCG at this point in time as opposed to selling off its bitcoin assets.
The second option would mean that Gemini's $900 million debt would have to be borne by Genesis itself, which would force Genesis into bankruptcy, as it is clearly not in a position to repay such a large amount of debt. Because of the debt relationship with Genesis, DCG's assets will also be at risk of being liquidated. The collapse of Genesis/DCG would also have a significant impact on crypto traders, as it would directly affect GBTC, the largest bitcoin investment product in the world, which holds the world's largest bitcoin reserves. If investors are able to redeem their GBTC shares for bitcoin or dollars, this will undoubtedly lead to another round of plunges in bitcoin and other cryptocurrencies.
What will be the impact of DCG on the crypto industry if it crashes
If DCG goes bankrupt, the negative impact on the crypto industry will far exceed that of FTX and LUNA, which will not only seriously undermine the confidence of industry practitioners and lead to increased selling pressure in the secondary market, but also cause further damage to the reputation of the crypto industry and discourage traditional financial institutions. Gemini has already given an ultimatum of January 8, and as the time draws near, the final outcome will be revealed soon. Whether it is the bankruptcy of Genesis or Genesis and DCG, it will be a heavy blow to the crypto industry.
Bitcoin price could fall back to 3000
If DCG, which has 630,000 GBTC, really goes bankrupt, then the entire crypto market's trust base will not be far from collapsing, and DCG's GBTC assets will be sold off to the market. The last Terra Luna mine only cleared 80,000 bitcoins, and the price of bitcoin plummeted from $40,000 to $20,000. With GBTC currently holding 630,000 BTC, it's possible that the price could fall back to $3,000 in the event of a liquidation.
Mining companies will struggle even more
Once the price of bitcoin drops significantly, miners, who are already having a hard time in this bear market, will be forced to sell their bitcoins to get by, causing the price of bitcoin to spiral downward. Currently, mining companies that have gone public or seen their share prices plummet include Compute North (bankruptcy), Argo (share price plunged 50%), Bitfarms (Nasdaq issued a delisting warning), and Core Scientific (share price nearly went to zero). And according to CoinDesk, mining companies are expected to have at least another $1-2 billion in debt stock that remains unexposed.
Sparking a wave of bankruptcies across the blockchain industry
Crypto mining companies are generally highly leveraged in the crypto industry, and in common forms of debt, mining companies tend to seek loans in the form of collateral for mining devices. Crypto finance companies such as NYDIG, BlockFi, Galaxy Digital, Silvergate, Trinity Capital, WhiteHawk and others can provide such loans. The collapse of FTX is considered the Lehman Brothers moment in the crypto market, causing the collapse of dozens of well-known institutions in the crypto industry, and as the world's most well-known investment DCG, as the world's most well-known investment institution, has a broader scope and industry than FTX, and its collapse will trigger a wave of bankruptcy not only in the crypto industry but also in the whole blockchain industry, which will also become the darkest moment for the whole blockchain industry.
Conclusion
If DCG does go on a crash, it may be the last one in the crypto industry, a view that is now accepted by most crypto enthusiasts. Coincidentally, this view can be interpreted in exactly two directions. One is that DCG's crash will cause a collapse of trust in the whole crypto industry and the crypto industry may go into decline from now on; the other is that if DCG fails, all the crypto institutions that have the potential of lightning in the crypto market will close down with this wave of bankruptcy, and then the remaining crypto institutions will undoubtedly be the best and safest, and the crypto industry will be reborn and there will be no more flash crash incidents from now on. The two views represent both two directions and two outcomes. The market also seems to be waiting for a choice of direction at the moment, as the bitcoin price has been consolidating around $16,500 for eight consecutive weeks, neither breaking out to the upside nor turning around to the downside. The direction of the DCG event may be the key to where this market will go in the future.