Market Spotlight: Back to Genesis
Join CryptoCompare as we explore the latest events in the digital asset industry with our market-leading data insights. Today, we’ll be taking a look at:
- Genesis’ Role in the Market & Exposure to FTX
- Implications for Digital Currency Group (DCG)
- The Potential Collapse of Genesis and its Implications for the Industry
- Growth in DEX
- What Lies Ahead for Centralised Exchanges and the Cryptocurrency Industry
This blog features CryptoCompare’s market-leading data. If you would like to trial our data, please register here.
State of the Market
On the 11th of November, FTX Group and over 100 affiliates filed for Chapter 11 bankruptcy, including FTX US, the separate, American-based exchange. Two weeks on, the contagion effects from the fall of one the biggest entities in the industry are still being felt, with FTX Group being not just an exchange for retail and institutions, but also a market maker and VC investor.
The group currently in the spotlight for fears of its exposure to FTX is Digital Currency Group (DCG) and its subsidiaries, most importantly Genesis Trading and Grayscale Investments. Rumours are circulating that DCG is attempting a $500mn raise to solidify its finances following the collapse of FTX, after failing to raise $1bn. If at risk, the insolvency of DCG would have catastrophic implications for the industry.
Genesis’ Role in the Market & Exposure to FTX
Genesis Trading is predominantly an OTC trading counterparty as well as a lending and borrowing firm. Both functions allow it to be a key component in digital asset infrastructure.
First, as an OTC venue, Genesis facilitates large transactions while simultaneously limiting price impact on the market, by having transactions take place outside public exchanges. However, this means Genesis may temporarily take on directional risk when carrying out an OTC deal, as it might not be able to immediately hedge its exposure to some trades.
Second, as a borrower/lender, Genesis can borrow and/or lend assets for a yield, thereby increasing the interest earned across the industry but also exacerbating the use of leverage. Genesis has historically been one of, if not the largest originator of loans in the industry — having $12.5bn in active loans at the market peak in Q4 2021, down to $2.80bn at the end of Q3 2022, as shown by the Figure below.
Genesis has been at the centre of the most important market events this year — a timeline has been included below:
The above events highlight that Genesis had counterparty risk from the three biggest bursts in the crypto space this year, outlined in the table below:
Thus, Genesis’ lending platform has undoubtedly suffered heavy losses this year. Furthermore, while the winding down of its books is an effort at de-risking, it is unknown whether any of these loans have been closed at a loss. More importantly, price declines from FTX’s debacle and further market contagion suggests that some other loans on Genesis’ balance sheet may be at risk of not being repaid, as counterparties may not have enough cash to meet further collateral requirements and may default on their loans. Withdrawals from Genesis’ lending arm have exacerbated this issue and led to its pause on withdrawals.
The true state of Genesis’ balance sheet is unknown — while they claim to just be facing liquidity rather than solvency issues, lessons from this year suggest that one must not trust, but verify. The potential collapse of Genesis has important implications:
Implications for DCG:
As one of the biggest conglomerates in the crypto industry, a potential insolvency of Genesis has dire consequences for its parent company, DCG. DCG’s most valuable subsidiary is undoubtedly Grayscale — the world’s largest digital asset management company, with its GBTC and ETHE trusts taking 69.5% and 23.2% of total AUM respectively at the end of October, according to CryptoCompare’s Digital Asset Management Report.
Legal documents suggest that the structure of Grayscale is completely independent from Genesis and the rest of DCG. However, a lack of transparency and the sharing of on-chain addresses (i.e. Proof of Reserves) adds to fears surrounding the use of Grayscale’s underlying BTC, ETH, and other assets. While we find it highly unlikely that DCG commingled Grayscale assets with Genesis’ lending books (à la FTX-Alameda), a significant shortfall in Genesis’ balance sheet could be extended to DCG itself, thus putting the parent company at risk of liquidation.
Most importantly, insolvency of DCG would lead to the unwinding of its Grayscale funds — and thus place enormous sell-side pressure on the market as one of the largest holders of BTC and ETH — with 635,235 BTC and 3.44mn ETH held as the underlying for GBTC and ETHE as of 30 September.
Implications for the general crypto market:
Regardless of potential implications for DCG, which would exacerbate the problem, the potential insolvency of Genesis will magnify the contagion caused by FTX. Indeed, multiple exchanges are known to use Genesis for their yield-generating products, most notably Gemini’s Earn product (which held over $3bn of assets in August 2021) and Circle’s Yield program. An insolvency announcement of Genesis would put these funds at risk, and cause further distress and contagion among market participants.
As a firm with other business lines, an insolvent Genesis will also have ripple effects on other subsectors — reducing the size of the OTC market and thus potentially leading to large trades being carried out in public exchanges (and thus larger price impacts and volatility), or lower liquidity due to the absence of Genesis’ market making arm. While it is important to reiterate that the extent of Genesis’ issues are unclear, the above must all be taken into account to fully comprehend the potential scale of the collapse of yet another centralised market player.
The high-profile events this year, including the Terra implosion, the meltdown of crypto lending products, and the collapse of the FTX exchange, have shattered the confidence and trust of investors and potential crypto participants. These events seem to have pushed the crypto space one or two years back to a time when users questioned whether their deposits in CEXs were safe. Understandably, it will take time, transparency and regulation to slowly build back the trust and credibility of CeFi products in crypto.
Exchange Spotlight: FTX’s Ripple Effect
Undoubtedly, the collapse of FTX has fueled panic and reduced risk taking among investors, leading to an outflow of funds from centralised exchanges. Contagion concerns in the market have caused Bitcoin’s price to plummet, reaching a yearly low of $15,608 on the 22nd of November. Daily outflows from centralised exchanges also skyrocketed during November. Outflows recorded on the 11th of November were 361% and 154% higher than October’s average daily outflows, recording 2.13bn and 1.65bn for BTC and ETH respectively on the day.
FTX was once viewed as the poster child of the crypto industry — raising $400mn in January 2022 at a $32bn valuation from the likes of Sequoia Capital and SoftBank. Its collapse will have far-reaching effects on the industry — apart from contagion, we believe the fall of one of the largest exchanges will change the dynamics of the centralised exchange’s market by shaping policymaker’s position on the sector, impacting future regulations and exchange governance. In the following section, we dive deep into this ripple effect.
Exposing Exchanges
The collapse of FTX has put into question the business model utilised by exchanges across the industry, and whether other major players employed a similar fractional reserve system, using customer deposits to fund business activities. To address this, CryptoCompare released a blog post on Exchange’s Market Structure on November 18th to dive into the market structure of FTX and other exchanges that may operate as unregulated banks. Many exchanges have witnessed major liquidity crunches, withdrawal halts, and several outage problems following the incident. For instance, following the bankruptcy news:
- Liquid, an FTX-owned exchange, halted withdrawals on the 15th of November after FTX filed for voluntary Chapter 11 Bankruptcy.
- Crypto.com also experienced a crunch in liquidity and huge withdrawal volumes, alongside a dump in the exchange’s token CRO, after rumours of association with FTX and concern about the exchange’s customers’ funds. (14th Nov)
- AAX, the Hong Kong-based exchange, was another exchange to suffer from withdrawal halts before it stopped operations completely. The company later claimed that the suspension of the withdrawal was due to security reasons and is not correlated with the FTX issue in any way. (13th Nov)
- Several other exchanges: have seen major crunch in their liquidity and major price deviations including Bittrex, Gatio.com and Independent Reserve.
Growing Attention for DEXs
Market participants have looked for alternative trading venues as outflows from centralised exchanges spike. As a result, trading volumes have risen within decentralised exchanges. Uniswap average daily volumes rose 20.2% in November to $147mn (data up to the 21st of November), while dYdX volumes increased 187% during the same period. This increased activity in DEXs has been reflected in token prices against BTC, especially for DYDX, whose price increased 43.4% on the first 21 days of November. This signifies how decentralised exchanges are acting as a substitute venue for traders and investors, leading the way for increased adoption of decentralised finance and the mantra of “Not your key, not your funds”.
It is also worth mentioning that historically, the spot trading volume on CEXs has dwarfed their decentralised counterparts, with the latter recording their highest market share in January 2022 at just 9.57%. With users’ confidence in CEXs shaken following the collapse of FTX, and the resilience DEXs has shown to the contagion in the Market we expect increased adoption of DEXs in the coming months among market participants.
What’s Next
There are now concerns that Binance has enforced its position as a monopoly in an industry that is supposedly built on decentralisation and the elimination of intermediaries like centralised counterparties. This covers not just CEX volumes, but also the centralisation of blockchain networks.
For instance, the transition of Ethereum to Proof of Stake (PoS) has meant that exchanges like Coinbase and Binance have a significant percentage of total staking pools on the network, which poses a question about general decentralisation in the whole industry — Bitcoin maximalists will indeed point to this as a downside of Ethereum and other smart contract platforms.
Asset Spotlight: Individual Narratives
While the overall market suffers from the fall of FTX and subsequent contagion, a number of assets have benefited from distinct narratives that have allowed them to outperform. Outlined below are three assets which have been exposed to such narratives:
- Trust Wallet Token (TWT): The concept of self-custody has gained traction even amongst the most experienced market participants following the collapse of one of the largest custodial exchanges in the market. TWT is the utility token of Trust Wallet, one of many wallet applications out there, but one of the few with its own token. While TWT does not have any tangible utility, a compliment from CZ during a Twitter space has contributed to an 79.1% price increase so far in the month of November.
- Litecoin (LTC): The current uncertainty in the market and the further drops in BTC prices led traders to escape to other assets that have comparably low volumes. In November, LTC returned 28.2% as its hashrate reaches all-time highs at 547 TH/s. Furthermore, confirmation that Litecoin’s third halving event will take place in July 2023 has led to speculation surrounding previous technical analysis patterns that precede the halving event. These factors have contributed to LTC’s positive returns this month.
- Chilliz (CHZ): CHZ is the native token of the Chilliz blockchain, which hosts a range of football-related tokens. In anticipation of the 2022 World Cup, CHZ outperformed in Q3, returning 141% in three months. However, the token has lost momentum and has so far fallen 17.6% in November (albeit a negative return, it has still outperformed BTC and ETH this month)
Trial CryptoCompare’s Market Leading Data
If you’ve enjoyed our latest insights then make sure to follow us on Medium to keep up to date with everything CryptoCompare. You can also sign up for our institutional newsletter to receive our insights and industry-leading reports straight to your inbox.
This post features CryptoCompare’s digital asset data, the most complete and in-depth liquidity data available on the market. You can contact our team for a demo of our products here.
