Bitcoin fell below $16,000 early Monday as worsening liquidity issues raised cryptocurrency concerns following the collapse of Sam Bankman-Fried’s FTX. Unconfirmed social media chatter over the weekend had crypto industry sources, including a unit of Digital Currency Group, questioning whether the venture capital giant could be the next crypto domino to fall.
DCG owns Grayscale Investments, manager of the world’s largest crypto fund, Grayscale Bitcoin Trust (GBTC). Grayscale holds more than 3% of the world’s Bitcoin. DGC also owns crypto broker Genesis Global Trading and digital-asset news outlet CoinDesk.
Genesis sought an emergency loan of $1 billion last week, the Wall Street Journal reported on Thursday. The firm halted withdrawals for its $2.8 billion crypto lending unit, Genesis Global Capital, on Wednesday after confirming liquidity issues following FTX’s bankruptcy filing. The company announced “abnormal withdrawal requests” from customers that exceed its current liquidity.
Two of Genesis’ biggest borrowers were Singapore-based crypto hedge fund Three Arrows Capital and FTX-affiliated trading firm Alameda Research. Three Arrows Capital, Alameda and FTX are all in bankruptcy proceedings. Three Arrows Capital filed in July while Alameda and FTX filed together in November. DCG filed a $1.2 billion claim against Three Arrows in July court proceedings after Genesis lent the firm $2.3 billion.
On Nov. 11, DCG gave Genesis an equity infusion of $140 million as FTX began to collapse.
And the Gemini crypto exchange paused withdrawals on interest-bearing accounts as a result of the announcements, as Genesis is the lending partner for the program.
Grayscale Bitcoin Trust Price Drops
Grayscale announced that its products “continue to operate business as usual, and recent events have had no impact on product or operations.” Grayscale says that Genesis Global Capital is not a counterparty or service provider for any Grayscale product. In an SEC filing from Oct. 3, Genesis was terminated as authorized participant of GBTC but continues to serve as its liquidity provider.
Grayscale products and GBTC’s underlying assets are held in segregated wallets in cold storage by its custodian Coinbase (COIN), the company said. However, Grayscale declined to share its full proof of reserves due to “security concerns.” On Friday, it shared a letter from Coinbase Custody Trust confirming the 635,235 Bitcoin in storage.
“To be perfectly clear: the BTC underlying Grayscale Bitcoin Trust are owned by GBTC and GBTC alone,” Grayscale tweeted. Many investors online are worried that DCG may start dumping its Bitcoin holdings to bail out Genesis. But Grayscale reassures investors that isn’t the case.
Meanwhile, Cathie Wood is snapping up GBTC at a discount. Ark Investment management purchased more than 315,000 shares of GBTC worth about $2.8 million for its Ark Next Generation Internet ETF (ARKW) last Monday, Bloomberg reported.
GBTC stock fell 5.5% early Monday to $7.85 per share. The price has plummeted roughly 78% so far this year as Bitcoin collapses with the wave of crypto bankruptcies. Shares are well below their all-time highs near $58 from February 2021, prior to the current crypto ice age.
Bitcoin, meanwhile, dropped below $16,100 from its low-$21,000s level in early November following FTX’s bankruptcy.
FTX Collapse Explained
The FTX exchange has thrown crypto markets into turmoil the past two weeks after filing for Chapter 11 bankruptcy on Nov. 11. Founder and CEO Sam Bankman-Fried resigned and was replaced by John J. Ray III. The former Enron cleanup exec slammed SBF saying, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”
The fourth-largest crypto exchange by volume faced a massive liquidity crunch after revelations that its native FTT token made up a majority of sister trading firm Alameda Research’s balance sheet. Crypto exchange Binance announced it would liquidate its FTT holdings on Nov. 6, sparking more than $6 billion in withdrawals from FTX within 72 hours.
Unknown publicly at the time, Alameda Research owed FTX about $10 billion in loans made up of customer deposits. Meanwhile, FTX invested user funds in various crypto projects and lesser-known tokens — some of which were Bankman-Fried’s own initiatives, exacerbating the liquidity issues.
As FTX crashed, Bitcoin fell near $15,800 from above $21,200 within four days, dragging cryptocurrency prices with it. Investors transferred more than $3 billion in Bitcoin from exchanges to personal wallets in the week of FTX’s bankruptcy, Glassnode data compiled by CoinTelegraph shows. Bitcoin recovered about $16,500 as of Nov. 17, but fell again as more liquidity issues emerged. Major cryptocurrency prices are still down 20% or more since FTX’s liquidity issues started on Nov. 5.
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