Why does GBTC have a negative premium rate of nearly 50%? The recently leaked bankruptcy documents of Genesis, a cryptocurrency lending company, finally revealed some truths. According to the information, the main situation is summarized as follows:
1. Genesis promises to provide GBTC products to Earn users of the cryptocurrency exchange Gemini;
2. Genesis suspends withdrawals;
3. Gemini cancels the foreclosure of GBTC;
4. Gemini sold GBTC to private buyers, resulting in a widening price gap.
Gemini “inhumane” first, Genesis “unrighteous” later?
According to the information disclosed in the bankruptcy documents, it seems that the cryptocurrency exchange Gemini was “unkind” first, which eventually led to Genesis’ injustice. Next, let us analyze the ins and outs of the entire incident in detail according to the timeline.
On August 15, 2022, two months after the bankruptcy of Three Arrows Capital (3AC), the cryptocurrency exchange Gemini signed a Security Agreement (Security Agreement), which included a GBTC purchase commitment worth US$465 million, Purchase 31 million GBTC units for $15.06.
For Gemini, the deal was risky, and their Gemini Earn income product risk manager had asked Genesis to provide collateral as soon as possible: “Hey, Genesis, we (Gemini) have a lot of unsecured risky assets, so hurry up and send collateral. Give it to us.”
Gemini risk managers are right to be concerned for three main reasons:
1. Increased risk of centralization of counterparties;
2. Genesis outstanding loan to start construction;
3. Potential risk contagion from Gemini.
No one wants to become the next Three Arrows Capital.
(Note: Three Arrows Capital once obtained a loan of up to US$2.36 billion from Genesis, accounting for almost 50% of Genesis’s total loan amount. The data shows that the loan provided by Genesis to Three Arrows Capital was supported by a total of about 17 million GBTC shares. )
On November 7, 2022, Gemini Exchange and Genesis amended the collateral agreement, and the two parties agreed to extend the repayment period first. The reason for this is to allow Genesis more time to repay Gemini Earn creditors.
On November 8, 2022, the cryptocurrency exchange FTX announced that it would stop withdrawals. Although Genesis negotiated with FTX for a long time, the final implosion of FTX made Genesis completely lose hope of getting the funds back.
On November 10, 2022, Gemini Exchange and Genesis made a second amendment to the Collateral Protocol. This time, Digital Currency Group (DCG) joined and became a part of the collateral agreement. DCG stepped in primarily in the hope of helping Genesis by staking another 31 million GBTC shares.
On November 16, 2022, Genesis announced a suspension of withdrawals. On the same day, the cryptocurrency exchange Gemini began selling GBTC collateral in a private sale transaction (meaning that Gemini did not comply with the collateral agreement requirements revised by the two parties on November 7), at a price of $9.20 per GBTC stock, selling a total of 30.9 million shares, and used proceeds of $284.3 million less foreclosure costs and expenses to pay down debt. ——And on November 7, 2022, that is, 9 days ago, the stock price of GBTC was $12.15 per share, which means that Gemini sold GBTC at a discount of 25%, and the size of the sale accounted for 10% of the total circulation of GBTC 5%.
From the figure below, we can see what happened on November 10, 2022 and November 16, 2022. November 10, 2022 is the return date of GBTC collateral, and November 16, 2022 is when Genesis announced the suspension of withdrawals And the date when cryptocurrency exchange Gemini started liquidating GBTC. After Gemini sold GBTC at a discount, some private buyers began to short or sell GBTC in the open market to hedge risks, resulting in a further expansion of the negative premium rate.