White Man. (Any views expressed in the below are… | by Arthur Hayes | Nov, 2022

Last week I described how Sam Bankman-Fried was the right kind of white boy, and how he leaned into this persona to convince the Western financial establishment and the crypto industry alike to overlook his shortcomings and not ask too many questions. Here is how he describes what he did in his own words to Vox:

Unless you want to store your wealth in physical cash or gold and conduct all transactions face to face, it is impossible to self-custody your assets in the analog TradFi system. You simply have to entrust your assets to banks and money managers. These intermediaries allow money and assets to move from point A to point B.

With that little thought experiment out of the way, let me hop off my soapbox and jump into the meat of how this DCG / Genesis / GBTC (the G-Unit) situation came to pass.

Despite many efforts by many different groups to secure approval for one from the SEC, it eventually became clear that an exchange traded fund (ETF) — whereby a manager accepts cash or Bitcoin from an investor and uses it to create units of the ETF, which then trade on a stock exchange in the capital of Pax Americana, New York City — was not in the cards for US investors. Recognizing that the lack of an ETF had created significant pent up demand from less tech-savvy investors looking to get in on the BTC action, Mr. Shillbert found a way to create the next best thing.

I want to thank DataFinnovation for this article, which lays out the little games that Mr. Shillbert was likely playing with DCG, Greyscale, and Genesis.

Step 1 — Get Capital into Genesis

Genesis and Gemini entered into a partnership whereby Gemini would lend its customer’s capital to Genesis for a fee. This was called the Gemini Earn product. As a Gemini user, you could pledge your BTC or USD and receive interest from Gemini. Gemini took those funds and lent them to Genesis at a higher rate than it paid to users through Earn. Now, Genesis had lots of capital to lend. Remember — Genesis is in the business of crypto lending.

Step 2 — Create GBTC with Borrowed Money

Genesis would lend Bitcoin to firms like the now defunct Three Arrows Capital (3AC) and BlockFi, and those firms would turn around and give their borrowed Bitcoin to Grayscale to create GBTC shares. (We know that 3AC was the largest firm doing this trade as they held so many shares they had to declare them to the SEC.)

  1. 3AC borrows BTC from Genesis.
  2. 3AC hands the BTC to Greyscale and creates GBTC shares for itself.
  3. In six months, 3AC receives the GBTC shares and hopefully sells them at a premium on the market.

Step 3 — Lend USD against GBTC collateral

Remember that Genesis is borrowing USD from Gemini and its Gemini Earn product. It is paying a fee for this USD, so it needs to find someone to lend the USD to so it can turn a profit. Genesis turned around to firms like 3AC and said, “Hey, thanks for creating all those GBTC shares with my sister company Greyscale! Since they won’t turn a profit for you until you can sell them six months from now, how about you hand them over to us as collateral in exchange for a USD loan?” 3AC agreed, and was happy to get immediate, USD liquidity on the profit it wasn’t expecting for another six months. We know that 3AC borrowed up to $2 billion using this circular method, generating a lot of fees for Genesis. Mr. Shillbert doesn’t fuck for free.

Step 4 — Market, Please Don’t Go Down

Unfortunately, this whole circular jerk fest was predicated on GBTC continuing to trade at a premium. As the premium turned into a discount in 2021, firms like 3AC and BlockFi couldn’t afford to pay for the USD loans they had taken out from Genesis. Because they had given GBTC to Genesis as collateral for their USD loans, when the value of GBTC dropped, they were in danger of needing to put up additional collateral to cover GBTC’s loss in value.

Bad Debt

In a bid to corral as much capital as possible into GBTC, Mr. Shillbert and his collaborators effectively destroyed Genesis and DCG. That is because 3AC, BlockFi, and many others who put this trade all defaulted on their loans. They defaulted because:

  1. GBTC went from a premium to a discount. GBTC was the collateral underpinning all these loans, and when GBTC lost value, the loans became bad.
  2. The Terra collapse affected many of Genesis’ borrowers such that any other collateral provided for their BTC and USD loans was also in the dumpster. Remember that Bitcoin, Ether, and the whole shitcoin complex declined 50% to 90% in the weeks after the Terra ecosystem collapsed.
  3. And the coup-de-grace was the stupendous con job executed to perfection by do-gooder white boy SBF. Alameda also borrowed from Genesis, and I can’t imagine they didn’t have the GBTC premium trade on as well.
  1. $575 million borrowed from Genesis to do “investments” and buy back DCG stock.
  2. $375 million credit facility.

Obviously the further drop in Bitcoin, Ether, and shitcoin collateral — coupled with what is probably a Jupiter-sized hole in Genesis balance sheet following the FTX / Alameda blow up — was too much for Mr. Shillbert to financially engineer his way out of. If it were any other way, surely Mr. Shillbert would play the same trick with DCG buying Genesis’ bad debt by borrowing money from Genesis.

  1. Sell USD, buy GBTC.
  2. Open a short Bitcoin / USD perpetual swap or short Bitcoin / USD futures position to hedge the Bitcoin / USD exposure.
  3. Wait until either the discount swings into a premium or GBTC can be redeemed at par.
  4. If GBTC swings to a premium, sell GBTC, buy USD. Then close the short derivatives position.
  5. If GBTC can be tendered for either BTC or USD, redeem GBTC. If you receive BTC, sell it for USD. Then close the short derivatives position.
  1. Sell USD, buy GBTC.
  2. Wait until either the discount swings into a premium or GBTC can be redeemed at par.
  3. If GBTC swings to a premium, sell GBTC, buy USD.
  4. If GBTC can be tendered for either BTC or USD, redeem GBTC. If you receive BTC, sell it for USD.

The inability to exit the GBTC roach motel is a good and a bad thing for the crypto capital markets. It’s a good thing because, if there was an easy way to redeem GBTC at these heavily discounted levels, it would mean a huge amount of physical BTC selling would occur. Holders of GBTC would either redeem their shares to capture the premium and then dump BTC they receive, or the Trust would dump the BTC on their behalf and give investors USD in exchange for their GBTC. Either way is Bad News Bears.

Our cucumber munching do-gooder little white boy is just a boy because his con was too flagrant. As a parasite, you don’t want to kill the host. It is better if the host lives and you bleed them slowly.

Baca Juga artikel Keluaran hk hari ini