Crypto Conglomerate Digital Currency Group (DCG) is at the Epicenter of the Cryptocurrency Earthquake

Photo Credit: USGS; Haiti 2010

By Stan Szymanski 

After writing last week about the troubles Genesis Trading had with the derivatives in their FTX account, Coindesk today reported this story about their new hardships:

…’The lending arm of crypto investment bank Genesis Global Trading is temporarily suspending redemptions and new loan originations in the wake of FTX’s collapse, Interim CEO Derar Islim told customers on a call Wednesday.’…(Coindesk ‘Genesis’ Crypto-Lending Unit Is Halting Customer Withdrawals in Wake of FTX Collapse’ 11/16/22)

Last week I wrote ‘Are the SEC and The Federal Reserve Part of the Story of Bankrupt FTX? Derivatives Become an Issue. In it, I included a quote from a Yahoo Finance story about the beginnings of stress on the derivatives at Genesis:

…’’Crypto broker Genesis said its derivatives business has about $175 million “in locked funds” in the company’s FTX trading account.

“This does not impact our market-making activities,” the firm said in a Twitter thread, adding “our operating capital and net positions in FTX are not material to our business.”…

Fast forward to Nov. 11, 2022-Coindesk reports that:

…’Crypto investor Digital Currency Group is giving an equity infusion of $140 million to Genesis Global Trading, a company within its portfolio.

“While the operation of our lending and trading businesses has not been impacted by recent market events, Genesis has taken steps to strengthen its balance sheet with an additional equity infusion of $140M from our parent company, Digital Currency Group,” Genesis told clients in an email, referring to the latest crypto market downturn caused by the collapse of crypto exchange FTX. The email was confirmed by a DCG spokesperson.

Do you believe that they were not impacted by recent market events? Neither do I. BTW, Coindesk is at least partially owned by Digital Currency Group.

Who is Digital Currency Group (DCG)?

The first claim on the DCG website is that DCG is…’The epicenter of the bitcoin and blockchain industry’…

The front page of the DCG website goes on to assert:

…’Our mission is to accelerate the development of a better financial system. We build and support bitcoin and blockchain companies by leveraging our insights, network, and access to capital.’…

So they are claiming to be the epicenter of the Bitcoin and blockchain industry. My first thought is that that is a strange choice of words, as an epicenter is something that is always at the center of an earthquake!

When DCG declares …’We build and support bitcoin and blockchain companies by leveraging our insights, network, and access to capital’… there is an interesting word in that phase; leveraging.

The first part of this saga starts when Crypto broker Genesis said its derivatives business has about $175 million “in locked funds” in the company’s FTX trading account.

The parent of Genesis is DCG. If Genesis holds derivatives, it is involved in leveraging.

Secondly, on Nov. 11, 2022 we saw that …’Crypto investor Digital Currency Group is giving an equity infusion of $140 million to Genesis Global Trading, a company within its portfolio.’… The term ‘an equity infusion’ is quite a broad term and could mean a lot of things.

It seems obvious in this case that Genesis was in some sort of liquidity crunch and apparently needed the $140 Million to keep the doors open (it wasn’t because the business was doing super and the parent wanted to make more money!). Was it because Genesis had been leveraging their bets with debt and the bet got tied up in a failed company ($175 Mill ‘locked’ in FTX) and they had to meet a margin call and get their account up to an acceptable level of equity to settle the debt? The $175 Million ‘locked’ in FTX was revealed on Nov. 10, 2022. DCG came through with the ‘equity infusion’ on Nov. 11, 2022. Do you believe in coincidences? If it was a margin call it probably happened due to the leveraging of pledged assets. Is that what ‘in locked funds’ means in double speak?

Then today we see: The lending arm of crypto investment bank Genesis Global Trading is temporarily suspending redemptions and new loan originations in the wake of FTX’s collapse, Interim CEO Derar Islim told customers on a call Wednesday.’…(Coindesk ‘Genesis’ Crypto-Lending Unit Is Halting Customer Withdrawals in Wake of FTX Collapse’ 11/16/22)

I would say that when the equity of the ‘house’ (Genesis) is below acceptable levels of risk, you stop lending money to people because they don’t have enough of a buffer to suffer the hit of another large negative event. Most likely a condition of them receiving the ‘equity infusion’ on 11/11/22. ‘Big Papa (DCG)’ IMHO had spoken.

How big is ‘Big Papa’? Let’s try to put it in perspective.

When I wrote my first article on FTX when all of this started (11/8/22) I was naive in thinking it was all about one company-FTX. After the bankruptcy was filed, we could see that FTX was a conglomerate of over 130 companies!

When I go to the DCG website and click on the ‘portfolio’ tab I count 166 crypto related business that DCG has an ownership interest in. One of those companies is FTX. 

So DCG, a conglomerate of crypto conglomerates, has a stake in FTX, a company who runs 130 companies itself. The effects of the FTX bankruptcy and its’ effect on the 130 companies that FTX owns will not be fully realized for weeks or perhaps months.

DCG also owns Genesis Trading which according to the Genesis website: …’Genesis connects institutional investors to digital asset markets. Trade, borrow, hedge, generate yield and more.’… so Genesis is lending, hedging and generating yield (which would typically involve leveraging). 

If FTX owned 130 companies, just how many does Genesis Trading own? According to the Genesis website:

“Genesis is the biggest trading desk for professional investors in cryptocurrency markets.”

— FINANCIAL TIMES, JANUARY 2022

“A digital asset prime brokerage – akin to Goldman Sachs in the traditional financial world – that offers its clients a full suite of services.”

— FORTUNE, MAY 2020

According to Financial Times and Fortune, Genesis is a behemoth. Just in the 3rd quarter of 2022 they traded $18.7 Billion in notional derivatives and had $2.8 Billion in active loans.

This ‘behemoth’ is the same one who received the ‘equity infusion’ from its parent, CDG. This same firm had $130.8 Billion of loan originations to institutions in 2021. Why would they need $140 Million from their parent company? Do you feel good about the prospects of this company after what happened to FTX considering Genesis still has FTX as one of its holdings on its website? How many companies does Genesis own/control?

DCG lists 166 crypto concerns (if I counted right) in its portfolio. FTX controlled over 130 companies. How many companies does each of these crypto concerns in the DCG portfolio hold? There are 165 (times how many companies each one controls) more to contend with if FTX is the crack that set off the tremor in the financial markets.

If DCG is as it claims (and IMHO I believe it is) …’The epicenter of the bitcoin and blockchain industry’, I believe that it truly will be at the epicenter of the most monumental financial earthquake in history. It is already involved with FTX, so that’s quite a start.

DCG gave Genesis Trading $140 Million in an ‘equity infusion’ after the FTX bankruptcy. DCG has positions/ownership in 164 (not counting FTX) other companies (all who own other companies). Just how many more times can Digital Currency Group afford to do this kind of bailout before it reaches its own liquidity crisis and says ‘no more’? DCG is already on the hook for FTX and now has Genesis Trading to bail out. In the 166 companies, just how much debt and leveraging is on the books? How much in derivatives has all that debt bought and how much of it will fail when the rest of the largesse of the crypto space falls precipitously like the star of Sam Bankman-Fried and FTX ?

Genesis has a problem in being exposed to the worst of crypto at the wrong time. In late June 2022 Yahoo Finance ran this story on Genesis: Genesis Faces ‘Hundreds of Millions’ in Losses as 3AC Exposure Swamps Crypto Lenders: Sources. FTX appears on the Genesis ‘Portfolio’ page of their website so they have FTX to negatively affect them. Crypto exchange Gemini warned customers today that there may be delays for withdrawals on its Earn product. This is due to the fact that Genesis is a lending partner to Gemini. And finally, Genesis has retained professional advisors to help them handle the storm coming at them.

There is no telling just how big and wide the problems of FTX, Genesis and DCG will spread. What can you do (this is not financial advice)?

Get out of the way.

Food. Water (and a way to purify). Shelter. Energy. Protection. If you have the wherewithal, precious metals have been money for 5,000 years and will last the rest of the days of the earth until the Lord Jesus returns for His people. 

IMHO, do not be in the ‘The epicenter of the bitcoin and blockchain industry’. It is a vast and violent quake zone we find ourselves in. Everyone will feel it. Some will lose all. All will lose some. Some will move their assets into the things that will see them through the convulsions that will change the landscape forever. A few will put their trust into hands of an eternal God who died on a cross and who, when He died, the earth shook and the world would never be the same. That is the only kind of earthquake that was beneficial for mankind. 

In whose mercy will find yourself when this earthquake hits?

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Stan Szymanski (or Encouraging Angels) is not a medical doctor. This is not medical advice. In all matters pertaining to the health and care of a human being consult a medical doctor. This is not legal, financial or personal advice. Consult appropriate professionals in those fields for that type of advice.