Bitcoin briefly hit a new two-year low on Monday, dropping below $15,500 by midday as worsening liquidity problems raised cryptocurrency concerns following the collapse of Sam Bankman-Fried’s FTX. Unconfirmed chatter on social media Over the weekend, crypto industry sources, including part of Digital Currency Group, had wondered if 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 owns over 3% of the world’s Bitcoin. DGC also owns crypto brokerage Genesis Global Trading and digital asset news outlet CoinDesk.
Genesis warned it may have to file for bankruptcy as it struggles to raise capital, Bloomberg reported Monday night. The digital asset brokerage sought a $1 billion emergency loan last week, the Wall Street Journal reported Thursday. The company 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 current liquidity.
Two of Genesis’ largest 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 jointly in November. DCG filed a $1.2 billion claim against Three Arrows in a court action in July after Genesis loaned the company $2.3 billion.
On November 11, DCG gave Genesis a $140 million equity injection as FTX began to collapse.
And the Gemini crypto exchange halted withdrawals to 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 to any Grayscale product. In an October 3 SEC filing, Genesis was terminated as an authorized participant of GBTC, but continues to serve as a liquidity provider.
Grayscale products and the underlying assets of GBTC are held by the custodian in segregated cold storage wallets Coin base (COIN), the company said. However, Grayscale refused to share its full proof of reserves due to “security concerns.” On Friday, it shared a letter from Coinbase Custody Trust confirmation of the 635,235 Bitcoin in storage.
“To be clear, the BTC that underpins Grayscale Bitcoin Trust is owned by GBTC and GBTC alone,” Grayscale tweeted. Many investors online fear that DCG may dump its Bitcoin holdings to save Genesis. But Grayscale assures investors that is not the case.
Meanwhile, Cathie Wood buys GBTC at a discount. Ark Investment management bought more than 315,000 GBTC shares worth about $2.8 million for its Ark Next Generation Internet ETF (ARKW) last Monday, Bloomberg reported.
GBTC shares fell as low as $8.32 by Monday’s closing bell after falling 5.5% early in the day. The price is down about 78% so far this year as Bitcoin collapses with the wave of crypto failures. The stock is well below its all-time high near $58 as of February 2021, ahead of the current crypto ice age.
Meanwhile, Bitcoin fell nearly $15,600 from its low of $21,000 in early November following FTX’s bankruptcy.
FTX collapse explained
The FTX exchange has been agitating crypto markets for 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 manager lashed out at SBF, saying, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information.”
The fourth-largest crypto exchange by volume faced a massive liquidity crisis following revelations that its own FTT token made up a majority of sister trading firm Alameda Research’s balance sheet. Crypto exchange Binance announced that it would liquidate its FTT holdings on November 6, bringing in more than $6 billion in FTX withdrawals within 72 hours.
Unknown at the time, Alameda Research owed FTX approximately $10 billion in loans made up of client deposits. Meanwhile, FTX invested user funds in various crypto projects and lesser-known tokens – some of which were Bankman-Fried’s own initiatives, exacerbating liquidity problems.
When FTX crashed, Bitcoin fell nearly $15,800 from over $21,200 in 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, according to Glassnode data collected by Cointelegraph. Bitcoin recovered around $16,500 on Nov. 17, but fell again as more liquidity issues emerged. Major cryptocurrency prices have continued to fall by 20% or more since FTX’s liquidity problems began on Nov. 5.
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