Recurring market commentary on what’s happening in the crypto markets, summarized by the Crypto Broker team at Crypto Finance AG.
Bitcoin (BTC) is currently trading at the 15.74k price mark (-5.4% in 7 days) while Ethereum (ETH) still falling and is getting traded at a price of 1.09k (-12.5% in 7 days). The price is further decaying as expected, after the events surrounding FTX.
The “post” FTX world is best summarised with the saying “trust nothing, verify everything,” as the entire industry is testing the trustworthiness of many players. Only those who did not play around and enhanced optimal risk management practices will survive. I am studying and keeping a close eye on:
- Genesis, Grayscale, and Digital Currency Group (DCG)
The Genesis case
The most interesting story here is not just about the likelihood of a Genesis bankruptcy, but rather the implications it would have on Grayscale in the event of Genesis filing for Chapter 11. What happened for a long time – when GBTC was trading at a premium – was the following:
- Funds borrowed BTC from Genesis as a lender pledging collateral
- Funds then passed those BTC on to Genesis as an Authorised Participant to create GBTC shares
- Genesis duly locked the BTC in the trust via Grayscale and returned shares
- Then the funds might have decided to sell the GBTC shares on the open market at a premium or – the more likely case – to pledge these shares back to Genesis for a USD loan; if the premium was large enough, this loan/profit was larger than the BTC initially borrowed
- Begin again at the top with Number 1
There are two implications/considerations involved: The circularity (it artificially influenced the market by making GBTC more attractive and pumping the spot price), and it turbo-leveraged many hedge funds (i.e. 3AC). And as long as the GBTC is trading at a discount and/or the spread widens, many borrowers will fail in paying back the loans. This hurts Genesis, Greyscale, and more generally, DCG.
As observed by QCP, the GBTC premium was one of the reasons for the bull market, as new in-kind capital was added to the market. Now that GBTC is trading at a discount, no new-capital is being added to the market. As long as redemptions continue being suspended, there is no mechanism for GBTC to go to par. It is now known that most of Genesis’s lending book depends on Grayscale’s trusts. So, what can DCG do to bring GBTC back at a premium and save Genesis?
- Returning capital to shareholders through buybacks of GBTC
- Or flipping the trust into an ETF, but this is out of their control (now it has become clear as to why they pushed for the conversion)
The GBTC is now backed by 635k BTC, so liquidating them is not going to be easy, and it will very likely hurt the market. In the chart below, you can see the premium (discount) of the main Grayscale trusts (GBTC, ETHE, LTCN, and GLNK).
Is Tether 1:1?
Coinbase: far from the bankruptcy?
Coinbase has suffered a great deal. But whether it now seems to be better positioned or not, its shares keep on plunging (USD/COIN: $41.23, -83% YTD), and its corporate bond expiring in January 2031 is now trading at USD 51 (face value: USD 100) with a coupon rate of 3.625%, implying a yield of 13.09%.
As investors will re-assess counterparty risk, we might see a bouncing back on the yield as some players might buy the bond as an insurance. Therefore, even if a higher yield implied a higher risk (or probability of default), bonds typically have some recovery rate (40-60%) even in the event of bankruptcy. Also, a drop in yield will definitely lead to a breather in the crypto space.
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