Crypto Weekly: New year, same contagion

Crypto Weekly: New year, same contagion

Mads Eberhardt 400x400
Mads Eberhardt

Cryptocurrency Analyst

Summary:  The crypto market was troubled by contagion throughout much of 2022. It is safe to say that the market has so far extended this chaotic environment to 2023, as Genesis Trading has not yet reopened withdrawals for its lending division and Silvergate Bank incurred a loss of $718mn in Q4 and cut staff by 40% last week.


Gemini goes head-to-head with Digital Currency Group (DCG)

We are not two weeks into 2023, but it is safe to say that the crypto market has so far extended the chaotic environment of 2022 to 2023 considering that the contagion continues.

The ongoing contagion was obvious as early as January 2nd, at what time co-founder of crypto exchange Gemini, Cameron Winklevoss, posted an open letter on Twitter to the founder and CEO of Digital Currency Group (DCG) named Barry Silbert. DCG is the sole owner of institutional-focused trading firm Genesis Trading. Before November, Genesis was one of the largest crypto financial service providers on lending, market making, and prime brokerage. Following the loss of up to $1.2bn to bankrupt hedge fund Three Arrows Capital in May 2022 and $175mn stuck on FTX in November 2022, Genesis is at best facing a liquidity crisis but potentially insolvency.

This caused Genesis to halt withdrawals for its lending division in November. The halting of withdrawals includes more than $900mn originating from 340,000 clients of the Gemini Earn lending program facilitated by Genesis. Since Genesis halted withdrawals, these clients have not had access to their funds to great frustration to the clients and Gemini. Although it appears that merely Genesis is obligated to reimburse clients, the reputation of Gemini is at risk, so the firm is trying to seek a solution as soon as possible. Yet, according to Winklevoss, Genesis is not greatly interested in achieving a solution. In the open letter, Winklevoss accuses Silbert of “bad faith stall tactics” and states that “time is running out” for Genesis to return the $900mn to the clients of Gemini Earn. He ends the letter by saying that they seek a public commitment from Silbert to solve the problem by January 8th. Winklevoss does not state the consequence if not. There is currently no update.

Besides owning Genesis, DCG owns the largest crypto asset manager Grayscale, which has seen its funds trade at a steep discount of up to 60% of the underlying asset partly due to concerns over the financial health of the whole organization. Another reason is that Grayscale cannot redeem shares of its funds to keep them from trading at a discount to the underlying asset. So not only is the future unclear for Genesis, it is likewise unclear for the moneymaker of DCG namely Grayscale due to hefty management fees for its funds. We wrote about the uncertainties about Grayscale in our 2023 Crypto Outlook.

Silvergate Bank was not spared from the contagion

The contagion does not end with Genesis. On Thursday, US crypto bank Silvergate announced that it incurred a loss of $718mn by selling debt as it faced a liquidity crisis in the fourth quarter. In addition, the bank has cut its staff by 40% and written off its $182mn acquisition of Meta’s Diem project it carried out early last year. To make matters worse, Moody’s downgraded the bank’s ratings following its recent financials. Silvergate banks almost every major exchange and crypto institutional investor, so its significance for the ecosystem should not be underestimated. The stock is down by around 32% year to date.

09_MAEB_BTC
Source: Saxo Group
09_MAEB_ETH
Source: Saxo Group

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.