Are your funds safe? Crypto lending platforms continue to fall

Key Takeaways

Genesis Capital have become the latest firm to get caught up in the crypto crash, suspending withdrawals yesterday
Gemini soon followed, suspending withdrawals on their Earn product
These are all yield -earning services, however – very different from FTX
FTX’s biggest transgression was masquerading as an exchange while acting as a hedge fund, gambling with client assets
All yield-earning products carry immense risk right now, our Analyst writes

The dominoes continue to fall, triggered by this FTX saga.

Major crypto lender Genesis Capital suspended withdrawals on its lending business yesterday. If there is one thing that crypto investors know by now, it is this: once that fateful decision to suspend withdrawals is taken, the jig is up.

This is a big deal. Genesis had $2.8 billion of active loans as of Q3 in 2022, while it originated $8.4 billion over the course of the quarter.  That’s a hefty chunk of change.

In my piece last week looking at what was next for crypto, I talked about the inevitable contagion.

“Expect some contagion to ripple out of this, as we don’t know yet who was exposed to who – but FTX, as such a large player in the industry, will no doubt drag a few bodies down with them”

Well, to quote that catchy Drake song, “bodies are (starting) to drop”. It’s just not a question of if; it’s more a question of who. 

Who will go bankrupt next?

Genesis said its decision to suspend loan operations was due to “abnormal withdrawal requests which have exceeded our current liquidity”. Yeah, I bet.

The ecosystem is – and will continue to be – tested to its limit. Let’s keep looking at Gensesis, a key figure in the lending space. One partner they have is Gemini, for whom they provide this yield-earning service. Gemini, the exchange run by everybody’s favourite identical twins, Tyler and Cameron Winklevoss (I wonder if Cameron is peeved that Tyler always gets listed first?), therefore had people worried. 

A few hours after Genesis’ announcement, Gemini then issued a statement saying that withdrawals from their Earn programme had been suspended. Inevitable. 

“We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible. We will provide more information in the coming days,” Gemini said.

1/6 We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days. https://t.co/9e48pF3Ymn

— Gemini (@Gemini) November 16, 2022

The firms join BlockFi in suspending withdrawals, yet another crypto lender in desperation mode following the FTX collapse. The firm is reportedly ready to layoff workers and file for bankruptcy. 

The difference between this and Sam’s products

There is a big difference between what is happening at all these companies and FTX, however. Sure, all the firms are employing reckless risk management, a complete lack of diversification and have been asking for all this mayhem. 

As Sam said in one of his stream-of-consciousness tweet threads (which have only served to throw gasoline on all this fire), “that risk was correlated – with the other collateral, and with the platform. And then the crash came…and at the same time there was a run on the bank”. 

Which, you know, should not exactly take a rocket scientist to figure out. Crypto is immensely correlated and extraordinarily volatile. So, when you invest in 100% crypto, it should not really be a surprise when these red days come. 

That is exactly what happened at BlockFi, Gemini Earn and all these products. You know – exactly like what happened at Voyager Digital, Celsius and all the other cowboy firms who promised customers yield in return for their assets. 

By now, people know these platforms are risky. They know that every cent they put in is vulnerable to a disappearance act. 

But FTX was not one of these platforms. FTX was an exchange. And riddle me this, Sam. How does an entity that is not a bank suffer from a run on the bank? I keep saying FTX was an exchange because it is vitally important. Customers should deposit cash to exchanges, before either leaving it there as cash, or buying crypto assets. Then, when they go to withdraw, it should just be…there. 

The exchange should make money on trading fees, deposit fees, whatever. It should not be acting like a fractional reserve bank, sending deposits to its sister trading firm and then gambling with them. 

Customers may have known what was going on at BlockFi and the gang, but with FTX, they didn’t. And that is why people are so angry. It’s also why it feels like fraud (although I have no idea about the ins and outs of the laws. My gut tells me Sam was smart enough to avoid direct violations, but who knows). 

What happens next?

$8 billion of cash doesn’t disappear into thin air without a few problems. Genesis is a big one, but there will be more. It’s why I am surprised that Bitcoin has held up relatively well. 

The pain won’t stop here, as discussed in my piece yesterday – not only is this a massive drain on liquidity, but Bankman-Fried had his hands on a lot of companies. 

For anyone still in yield-earning products, I would be very scared. For me, once Terra collapsed, these platforms presented a risk-reward profile which I simply couldn’t justify any longer. Sure, they may say that they are good, but so did management teams at Celsius, BlockFi, and all the rest of them. The most important thing to quell a bank run is to keep panic to a minimum – they all know that.

Is the yield – be it 4%, 5%, 10% – really worth risking all your holdings? This is no longer an up-only economy. This is a very real bear market, while within the cryptocurrency space, there is capital fleeing for the doors faster than ever before.

So let me ask again. Is that yield really worth it?

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