Amid the many recent developments surrounding the crypto markets that were significantly contributed to by 2022’s bear market, in a current Twitter thread, crypto analyst Ram Alhuwalai explained in detail the causes of these recent developments which saw Grayscale’s Bitcoin trust drop by an enormous 50%. The troubles also saw Genesis file for bankruptcy protection amid exceeded financial troubles at the firm.
What caused this fall?
According to Ram, the gap widened due to the sale of GBTC to a private buyer, Genesis’ pledge of GBTC to GeminiEarn, the suspension of withdrawals, the foreclosure on GBTC collateral, and the rest of the withdrawals themself were significant factors in this reduction.
11/ Those events are going to raise questions for securities lawyers. Can Genesis or DCG pledge 'restricted securities' as collateral?
Technically, in foreclosure legal title changes from Genesis/DCG to Gemini Earn. Is that sufficient to remove restriction? (I don't believe so)
— Ram Ahluwalia CFA, Lumida (@ramahluwalia) January 23, 2023
When did troubles begin?
According to the investigation, Gemini engaged for a Security Agreement on August 15, two months after 3AC’s collapse. At that point, a risk manager at Gemini Earn claimed they had a significant amount of unsecured risk. The advisor suggested Gemini’s position for collateral immediately. The risk management was probably worried about Genesis, growing counterparty concentration risk, a drop in the number of loans Genesis had outstanding, and Gemini-related spillover and contagion risks.
“They could have been worried about another 3AC” claims Ram.
Gemini and Genesis amended the Security Agreement on November 7. To give Genesis additional time to recoup debts owed to Gemini Earn, they decided to “term out” the contract. On November 8, FTX paused withdrawals as the parties bargained in the shadow of FTX’s explosion.
Gemini and Genesis signed a new supplement to the security agreement on November 10. Ram claims that this time DCG was involved in the deal as well. DCG presumably pledged an additional 31 MM GTBC from its GBTC-buying frenzy to support Genesis before it temporarily halted withdrawals. Gemini conducted a private auction of the GBTC collateral it had in its possession the same day for $9.20 per share, marking the start of the foreclosure process. The stock was valued at $12.15 on November 7.
Ram claims that a 25% haircut is necessary to facilitate the selling of GBTC (representing around 5% of GBTC in circulation). Expert analyst Ram also gives a graph showing the events of November 10 (the pledge date) and November 16 (the payment day) (Genesis suspends withdrawals & Gemini liquidates)
7/ A chart depicting what happened on Nov 10th (pledge date) and Nov 16th (Genesis suspends withdrawals & Gemini liquidates)
The private buyer likely hedged their risk via shorting or sold GBTC in the open market causing the discount to widen. pic.twitter.com/VQYKiv9M5T
— Ram Ahluwalia CFA, Lumida (@ramahluwalia) January 23, 2023
The widening discount might be attributed to the private buyer shorting or selling GBTC on the open market to offset their risk. The numbers from the study also indicate that $284,000,000 was made from the transaction. Foreclosure and sale were announced to Genesis by Gemini.
Genesis doubtful on Gemini
Genesis questions whether Gemini’s foreclosure and sale were conducted in a commercial fairway with enough notice. Genesis has not yet sent Gemini the “second tranche” of GBTC it promised on November 10.
Ram thinks they were taken aback by the news that Gemini had liquidated GBTC collateral and was concerned about another market drop in GBTC assets. Concerns have been raised about the applicability of Rule 144, which prohibits the sale of more than 1% of a security’s holdings by the issuer or its affiliates.
According to the law, GBTC holdings qualify as “restricted securities.” Ram confirms that the occurrences in the issue will prompt inquiries from securities attorneys. According to Ram, the legal title transfers hands from Genesis/DCG to Gemini Earn throughout the foreclosure process. But he isn’t sure it will be enough to break free from constraints.
