Department of Justice “Nothingburger” and a Possible Bankruptcy Filing by Genesis Take Their Toll as Bitcoin Longs Rush To Liquidate

Rohail Saleem
Bitcoin Genesis

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

A double whammy of back-to-back scaremongering has taken its toll on Bitcoin bulls, with the world's premier cryptocurrency briefly grazing the psychologically important $20,000 price level.

First, the US Department of Justice spooked crypto investors earlier this morning by communicating a "major announcement" slated for 12:00 p.m. ET. That development, however, turned out to be a "nothingburger," with the DoJ clamping down on the relatively obscure crypto firm Bitzlato.

Nonetheless, the intervening hours saw the fastest pace of liquidations in Bitcoin's long positions in a 1-hour timeframe since the 08th of November 2022.

Then, just moments ago, Bloomberg reported that the troubled crypto firm Genesis is preparing to file for bankruptcy as soon as this week, barring any last-minute fund-raising.

Recently, Cameron Winklevoss, the co-founder of Gemini, leveled striking allegations against Genesis and its parent company, Digital Currency Group (DCG), in the aftermath of the FTX saga. Bear in mind that DCG also controls Grayscale Investments, the firm behind the Grayscale Bitcoin Trust (GBTC).

In a public letter, Winklevoss leveled accusations that Genesis lent $2.36 billion to Three Arrows Capital (3AC) hedge fund on extremely lenient conditions. For the uninitiated, 3AC went bust in the summer of 2021 following the collapse of Terra's stablecoin USDT, resulting in a $1.2 billion hole in Genesis' loan book. Coming back, Winklevoss believes that Genesis and 3AC were engaged in a swap transaction of sorts to the benefit of DCG, where Genesis lent the funds to 3AC, which then invested these funds in the GBTC while posting GBTC shares as collateral to Genesis. This swap trade prevented GBTC shares from being sold in the open market and depressing the trust's share price. For those who might be unaware, GBTC shares can only be created and not redeemed. This means that investors can only unload their shares in the open market, resulting in an increasing discount in the current environment where there is no viable way to rebalance the Grayscale Trust. This trade continued even when GBTC shares started trading at a substantial discount to Bitcoin's spot price. The net effect of this illicit swap trade was that Genesis' balance sheet appeared much healthier than in reality, as Genesis mischaracterized its swap transactions as collateralized loans instead of risky derivatives.

Of course, the lending arm of Genesis, formally known as Genesis Global Capital, had revealed back in November 2022 that around $175 million of its funds remained trapped within the now-bankrupt FTX exchange. Concurrent with this disclosure, Genesis Global Capital halted all loan creations and redemptions, trapping the funds of 340,000 Gemini Earn users. As a refresher, under Gemini's Earn program, users could lend their crypto holdings to Genesis in order to earn interest. Of course, the SEC recently took a dim view of this program, accusing Genesis and Gemini of essentially offering "unregistered securities."

Coming back, it seems that DCG has opted to salvage the rest of its crypto empire by sacrificing Genesis. Nonetheless, the contagion vectors from Genesis' bankruptcy appear fairly limited at the moment.

Meanwhile, Bitcoin is currently trading above the cost basis of the average holder. This suggests that no lasting damage appears to have been incurred.

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