The crypto saga continues. It appears the next domino to fall is gonna be DCG/Genesis. Gemini’s survival is also questionable. Yesterday Gemini co-founder Cameron Winklevoss sent a letter of ultimatum to DCG CEO Barry Silbert, asking Genesis to pay back the $900M user deposits that were lent to Genesis. (Note: Genesis is a fully owned subsidiary of DCG.) Here is a quick recap of what happened. When FTX collapsed, it triggered bank runs across many centralized exchanges. Gemini is one of them. AFAIK, Gemini’s own exchange backs the user deposits 1-to-1. But Gemini has a special program called Gemini Earn where users can agree to lend their deposits out to earn interest. Gemini Earn users can request withdrawals any time for any reason. It all sounded good but what really happened was that Gemini Earn deposits were lent out to Genesis and Genesis had trouble meeting withdrawal requests after the FTX collapse. In the Gemini Earn TOS, Gemini is purely a middleman that is only brokering between Genesis and retail users. Gemini itself doesn’t take any default risks on the loan principals. Instead, the default risk is taken by Gemini Earn users. So when Genesis couldn’t meet the withdrawal requests, theoretically Gemini is not responsible for it. But of course the reality is more complicated. Gemini users accused Gemini of false advertising on the Earn product and Gemini lost the majority of the user deposits because trust has been lost after the withdrawals were halted. Gemini has a very strong incentive to make sure that Gemini Earn users are made whole. Hence, the letter of ultimatum.
So .. why does Genesis have trouble meeting withdrawal requests? According to the letter, DCG owed $1.675B to Genesis. $1.1B is the loss DCG covered for Genesis when 3AC blew up. It was structured as a 10-year term loan. The remaining $575M DCG borrowed from Genesis was allegedly being used to make venture investments and fund share buybacks. With this ginormous $1.675B outstanding loan from the parent company, Genesis has a liquidity problem to pay back the lenders and potentially a solvency problem. DCG was trying to raise money to resolve the situation but it seems that they couldn’t find any investors willing to pony up $500M+ to make it work and things are stuck with no resolutions.
Cameron Winklevoss is trying to force DCG’s hand here. Gemini’s magical thinking is that DCG can somehow come up with the money to make Gemini users whole. DCG’s magical thinking is that they can wait it out to raise more money and sell their investments at good prices to make all the problems go away. The issue is that there’s no liquidity flowing into crypto right now and perhaps for the next 18 months. Retail users are mostly gone and disgusted. Institutional users think crypto is toxic. The price manipulation game through leverage is long gone. What is most likely to happen is that Gemini forces Genesis/DCG into involuntary bankruptcy and it would cause more deleveraging and selling. I won’t be surprised that we see another major downtick of BTC to say below $10K. But I won’t be buying any BTC, ETH or any other cryptos. I am personally tired of this crypto game. This crypto drama was initially fun to watch but I am also getting tired of it. I don’t really see any appeal of investing in cryptos while I can invest in productive companies like Okta or Disney. At the same time, I don’t think the crypto speculation is going to go away unless regulators toughen up. People like to gamble and this madness will probably continue through another boom/bust greed/fear cycle. But guess what? I don’t care and I don’t want to be involved. I will have fun staying poor but at least I won’t inadvertently support a bunch of criminals.