Crypto bulletin

January 11th, 2023

Crypto Bulletin – Week 265

Finally some encouraging signs in the crypto market. Bitcoin managed to break through its tough resistance at $17,000, with the price furthermore closing above the 30- and 50-day moving average for five consecutive days. The price had not completed a day above the latter since November 7th. As the aftermath of the many bankruptcies of major players in the crypto industry fades, the chances of having truly hit the bottom of the bear cycle look good.

Among the question marks among these players is undoubtedly the fate of lender Genesis, a parent company of Barry Silbert’s Digital Currency Group (DCG). This is the topic that has really been in the news over the past week. First, last Thursday, DCG, owner of Genesis and Grayscale, confirmed the closure of its wealth management division called HQ. “Due to the state of the broader economic environment and prolonged crypto winter presenting significant headwinds to the industry, we made the decision to wind down HQ, effective January 31, 2023,” a DCG spokesperson told Decrypt. “We’re proud of the work that the team has done and look forward to potentially revisiting the project in the future.”

The decision to close HQ came on the same day that Genesis announced significant job cuts, with 30 percent of its workforce affected. The decision is due to the negative impact on DCG and its subsidiaries caused by the collapse of the FTX exchange in November. “These measures are part of our ongoing efforts to move our business forward. We sincerely appreciate the hard work of our talented and dedicated team as we continue to work to identify the best outcome for Genesis’s business, clients and employees for the long-term.” Was said by the company. Genesis has been struggling financially for some time, following a decision to stop withdrawals in November after the FTX implosion. The company announced at the time that it had $175 million in exposure to FTX.

According to a report published Friday by Bloomberg, DCG is under investigation by New York federal prosecutors and the SEC for internal transfers in its Genesis lending subsidiary. According to the same Bloomberg report, federal prosecutors in the Eastern District of New York have requested documents and interviews from DCG, citing people familiar with the investigation. In addition, the SEC is also conducting an independent investigation of DCG. The investigations have not yet been formally announced by the authorities and are in their early stages. It is worth mentioning that neither Digital Currency Group (DCG) nor its CEO Barry Silbert have been accused of any criminal activity by the authorities.

One of the companies most affected by Genesis’ troubles is undoubtedly Gemini, or more specifically its Earn program which allowed users to generate interest on their crypto assets via loans made through Genesis. Genesis reportedly owes $900M to customers of the Earn program. In that vein, Gemini’s Cameron Winklevoss has called for the resignation of Digital Currency Group (DCG) CEO Barry Silbert and has made multiple serious accusations against the cryptocurrency conglomerate, including allegations of false statements and accounting fraud. The statement claims that there is no future for the company as long as Silbert remains CEO and that he has demonstrated that he is incapable of managing the company. Winklevoss claims that Genesis, DCG and its key personnel, including CEO Barry Silbert, conspired to make false statements and mislead Gemini, its investors and the general public about Genesis’ financial condition. In addition, Winklevoss said claims made by DCG in early July that it had invested $1.2 billion in Genesis were false, and that DCG had not provided any actual funds to Genesis.

The dispute between Digital Currency Group and Gemini over blocked user funds continued to escalate throughout the week. DCG blamed Cameron Winklevoss for “malicious attacks.” In a response Tuesday on Twitter, DCG said Winkelvoss’ statement was “another desperate and unconstructive publicity stunt” and that the company was “preserving all legal recourse in response to these malicious, false and defamatory attacks.” Winklevoss claims DCG owes Genesis $1.675 billion, which would likely suffice to pay back Gemini’s defrauded customers, but Silbert says that figure is incorrect. On Tuesday, in a letter to shareholders, Silbert also denied the “completely baseless and false” rumors about DCG and severed all ties with FTX and its former CEO, Sam Bankman-Fried. Silbert claims that DCG “never had a relationship with Alameda,” but that Genesis had a “trading and lending relationship” with the crypto trading company, which was also founded by Bankman-Fried.

Then, later yesterday, as part of the ongoing public dispute with Genesis, Gemini officially ended its Earn program. Gemini informed its customers via email that this action was taken to pressure Genesis to repay the $900 million it owes Gemini customers. The message goes on to say that the action requires Genesis to return all remaining assets to the program. Customers can now see their earnings balances as “pending balances” as Gemini works to find a way to return the assets to users. “Returning your assets remains our top priority and we continue to operate with the utmost urgency,” the email states.

In short, if one had to sum it all up in a few words, it seems plausible that DCG is currently attempting to isolate its Genesis business from its other entities in order to place it in bankruptcy and thus discharge its massive debts. On the other hand, all Genesis’ creditors are trying to turn DCG into a single entity, so that the assets of the other business units can be used to repay Genesis’ debts.

This attempt by DCG has actually been reflected in the price per share of Grayscale Bitcoin Trust (GBTC), another entity owned by the company. The price of the over-the-counter stock jumped 11.56 percent on Monday to $9.65. That brought the discount to the net asset value (NAV) of its bitcoin holdings down to 38.55 percent, the lowest spread since mid-November.

As for the FTX saga, the next hearing will be held today in a Delaware bankruptcy court.  Preparation for the hearing has resulted in a series of legal filings, including a request to allow attorneys from Montgomery McCracken Walker & Rhoads to represent Sam Bankman-Fried’s interests in the case.

Binance yesterday acknowledged system failures that resulted in at least $1 billion being under-collateralized in its Binance Smart Chain BUSD offering, one of the company’s stablecoins, which is supposed to be backed 1:1 by the U.S. dollar. Industry analysts say the issue has caused BUSD to deviate from its fixed value at least three times. “The process of maintaining the peg involves many teams and has not always been flawless, which may have resulted in operational delays in the past,” a Binance spokesperson told Bloomberg. The BUSD on the Ethereum blockchain is fully backed by U.S. dollars, overseen by Paxos, a New York-based fintech company. However, the BUSD on Binance’s own blockchain, Binance Smart Chain, is not under the supervision of any external audited company. To validate its BUSD, Binance says it maintains it fully collateralized with Paxos-regulated BUSD. This BUSD held on Binance’s own blockchain is therefore called Binance-Peg BUSD. However, it appears that Binance-Peg BUSD has not always maintained its fixed value. A Binance spokesperson told Bloomberg that despite these delays in collecting the proper collateral, the pegging process has since been corrected. “Recently, the process has been greatly improved with enhanced divergence controls to ensure it is always 1-1 stowed,” he was quoted saying.

Following the legal changes in Canada regulating cryptocurrency exchanges that we recently reported, will no longer facilitate transactions involving Tether and plans to delist the largest stablecoin by market cap for customers in the country. “Please take urgent steps to review your USDT balance and take appropriate action,” the notice states. The decision to remove Tether follows a regulatory clarification from the Canadian Standards Association (CSA) in December. The update was posted on the Ontario Securities Commission’s website. “The CSA continues to monitor and assess the presence and role of stablecoins in Canadian capital market,” it stated. “As a result of this ongoing work, the CSA is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives.”

The market panic that followed the collapse of Sam Bankman Fried’s FTX exchange in early November appears to be subsiding. For the first time since the FTX collapse, three-month bitcoin futures (BTC) listed on the Chicago Mercantile Exchange (CME) are currently trading at a premium to the current spot market price. These futures contracts are seen by many as an indicator of institutional activity. The renewed premium indicates that institutional activity is no longer concentrated on the short side. The term structure of the CME futures contracts – the difference between futures contracts of different maturities at a given point in time – remains inverted or in backwardation, however. In other words, the far month’s contracts continue to trade at lower prices than the near month’s contracts, an anomalous situation considering that prices are generally higher at the long end of the curve.

As was the case for much of 2022, the macroeconomic trend is likely to dictate future price movements. We can expect the trend to be confirmed or reversed tomorrow when the U.S. consumer price index data for December is released.

As for the fund, it took back the majority of its positions during the week, with an exposure of about 50% to ETH among the invested capital.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of January 11th, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered. 

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