The Crypto Contagion Is Rapidly Spreading to the Leading Companies. A domino effect that could bring down one of crypto’s most venerable institutions has been sparked by the collapse of FTX.
The fallout from the demise of FTX just won’t stop, and it’s now posing a threat to one of the key organizations in the world of cryptocurrency. Due to “unprecedented market turmoil,” Genesis Global Capital’s lending division put a halt to withdrawals on November 16. To make sure it has enough cash on hand to pay its customers, the company is now looking for emergency funding of at least $500 million. The cryptocurrency industry keeps an anxious eye on events.
Genesis stated on November 21 that it had “no plans to file for bankruptcy imminently,” but since then, it has appointed a third party to provide advice on its financial situation. These actions haven’t done much to soothe agitated clients. Several previous cryptos collapse this year, including at FTX and Celsius, were preceded by withdrawal freezes.
The Crypto Contagion
If Genesis were to fail, it would deal another devastating blow to a sector that is still reeling from the demise of FTX, one of its most prestigious organizations. Can confidence be placed in the stability of any cryptocurrency company if a structure the size and stature of Genesis are vulnerable? Yes, it is anticipated that the industry will survive the test, but the era of lax regulation, generous funding, and quick growth is over.
It is important to not undervalue the effects of Genesis’ potential collapse. Although it may not be as well-known as FTX and other exchanges, it is essential to the daily functioning of the cryptocurrency industry.
The company dubbed the “Goldman Sachs of crypto” by the Financial Times, issued $131 billion in loans in 2021 alone and set up $116.5 billion in trades. Genesis takes out loans from “whales,” or people and organizations who own large amounts of coins, to pay for these loans. In exchange, the whales get a share of the profits.
Crypto Spreading to the Leading Companies
The market was booming, and Genesis was too. But as the value of cryptocurrencies plummets and confidence in major crypto companies dwindles, Genesis runs the risk of being the most recent instance of a major crypto company failing to plan for the worst. Customers might not only lose their money, but the failure of a middleman like Genesis could “set crypto back several years,” according to Brad Harrison, creator of the decentralized Venus lending protocol. Genesis facilitates the transfer of funds between organizations, which is necessary for any industry to function.
Genesis was the first over-the-counter bitcoin trading desk or place where traders could go to buy and sell large quantities of coins when it first launched in 2013. However, the business is also currently the biggest cryptocurrency lender and the foundation for yield farming services offered by exchanges, which allow users to earn interest on their holdings.
Harrison claims that over the years, Genesis has collaborated with many of the biggest crypto organizations and has essentially spread throughout the entire crypto sphere. It’s a well-known brand.
What is coming ahead?
Since the collapse of the hedge fund Three Arrows Capital (3AC) in July, which cost it $1.2 billion of the $2.36 billion it had borrowed from the company, Genesis has been having problems. Genesis did not have that option in this case because only a portion of the loan was secured by assets owned by 3AC. If a homeowner default on their mortgage, the bank can seize the property to recover the full amount of the loan.
Genesis’ parent company, Digital Currency Group (DCG), provided financial support to make sure it wasn’t hindered by the loss. However, as a result, Genesis reduced its workforce by 20% to cut costs, and Michael Moro, the company’s longtime CEO, resigned.
When FTX filed for bankruptcy on November 11, Genesis once more found itself on the wrong side of a collapse. As a result, the company lost $175 million that had been stored with the exchange. Once more, DCG stepped in and contributed $140 million in cash. Genesis, however, has been unable to avoid the FTX fallout despite numerous DCG bailouts.
Redeeming the Cryptocurrency
A well-known cryptocurrency expert and former chief strategy officer at the crypto infrastructure company Blockstream, Samson Mow, claims that the brokerage is having trouble keeping up with a rise in the number of customers requesting to redeem their cryptocurrency. This resulted in the suspension of withdrawals, which raises the risk of a rush on other lenders (like BlockFi or Voyager Digital), worsening the current confidence crisis, and spreading the contagion.
But according to Mow, it’s critical to realize that this is a liquidity issue rather than a solvency issue. In other words, Genesis has sufficient resources to cover its debts; they are just not easily accessible in the form of cash.
A bankruptcy “seems unlikely” as a result, according to Mow. DCG also sought to play down the situation on Twitter, saying that the decision to suspend redemptions and stop issuing fresh loans was a “temporary action,” and that the problem is confined exclusively to the Genesis lending division, which means the trading and custody units will continue to operate as normal.
Even so, the situation is critical enough for Genesis to look for more funding; potential investors include the cryptocurrency exchange Binance and the private equity firm Apollo Global Management.