Are your funds safe on cryptocurrency lending platforms?

Key points to remember

• Genesis Capital has become the latest company to get caught up in the downturn affecting the cryptocurrency world, suspending withdrawals yesterday.
• Gemini was quick to suspend withdrawals of its Earn product.
• However, all of these services are performance generators, very different from FTX.
• FTX’s biggest transgression was to pose as an exchange while acting as a hedge fund, playing with client assets.
• All products that generate returns currently carry immense risk, our analyst writes.

The dominoes continue to fall, triggered by this FTX saga.

Leading cryptocurrency lender Genesis Capital suspended withdrawals from its lending business yesterday. If there’s one thing cryptocurrency investors know by now, it’s this: once the fateful decision is made to suspend withdrawals, it’s game over.

This is a big deal. Genesis had $2.8 billion in active loans in Q3 2022, while generating $8.4 billion in the quarter. This is a large amount of money.

In my article last week on the future of cryptocurrencies, I talked about the inevitable contagion.

” Some contagion is to be expected, as we don’t yet know who has been exposed to whom, but FTX, as such a major player in the industry, will undoubtedly take some bodies.”

Well, to quote that catchy Drake song, “the bodies are starting to drop.” It’s not a matter of whether ; is more a question of to whom.

Who will be the next to go bankrupt?

Genesis said its decision to suspend lending operations was due to “abnormal drawdown requests that have exceeded our current cash flow.” Yeah, sure.

The ecosystem is – and will continue to be – tested to its limits. Let’s keep looking at Gensesis, a key figure in the lending space. One of their partners is Gemini, for whom they provide this performance service. So Gemini, the exchange run by the identical twins everyone loves, Tyler and Cameron Winklevoss (I wonder if Cameron is irritated that Tyler always appears first), has people worried.

A few hours after the Genesis announcement, Gemini then issued a statement saying that revenue withdrawals had been suspended. Inevitable.

“We are working with the Genesis team to help customers withdraw their Earn funds as soon as possible. We will provide more information in the coming days,” said Gemini.

1/6 We are aware that Genesis Global Capital, LLC (Genesis) – the lending partner of the Earn program – has paused withdrawals and will not be able to meet client refunds within the 5 business day service level agreement (SLA).

– Gemini (@Gemini). November 16, 2022

Companies join BlockFi in suspending withdrawals, another cryptocurrency lender in desperate mode following the collapse of FTX. The company is reportedly ready to lay off workers and file for bankruptcy.

The difference between this and Sam’s products.

However, there is a big difference between what is going on at all of these companies and FTX. Of course, all the companies employ reckless risk management, a total lack of diversification and have contributed to all this chaos.

As Sam said in one of his stream tweet threads (which only served to pour gasoline on this whole fire), “this risk was correlated – with the other collateral and with the platform. And then the crash happened…and at the same time, there was a race to retreat.”

Which, you know, shouldn’t take a rocket scientist to figure out. Cryptocurrencies are immensely correlated and extraordinarily volatile. So when you’re 100% invested in crypto, it shouldn’t be a surprise when those red days come.

That’s exactly what happened with BlockFi, Gemini Earn and all those products. You know, like what happened with Voyager Digital, Celsius and all the other cowboy companies that promised customers returns in exchange for their assets.

Right now, people know that these platforms are risky. They know that every penny invested is vulnerable to a disappearing act.

But FTX was not one of those platforms. FTX was an exchange. So what, Sam. How can an entity that is not a bank suffer a bank run? I still say FTX was an exchange because it is vitally important. Customers have to deposit money on the exchanges, before they leave it in cash or buy cryptoassets. Then, when they need to withdraw, it should be… there.

The exchange should make money from trading fees, deposit fees, etc. It should not act like a fractional reserve bank, sending deposits to its sister trading firm, then gambling with them.

Maybe customers knew what was going on at BlockFi and the band, but with FTX they didn’t. And that’s why people are so angry. That’s also why it looks like fraud (although I have no idea about the laws. My gut instinct is that Sam was smart enough to avoid direct violations, but who knows).

What happens next?

8 billion in cash doesn’t disappear into thin air without some problems. Genesis is one of the big ones, but there will be more. That’s why I’m surprised bitcoin has held up relatively well.

The pain won’t end there, as I mentioned in my post yesterday: not only is this a huge money grab, but Bankman-Fried had his hands on a lot of companies.

For anyone still in performance-generating products, I would be very scared. To me, once Terra collapsed, these platforms had a risk-reward profile that I just couldn’t justify. Sure, they can say they’re good, but the management teams at Celsius, BlockFi and all the others said so too. The most important thing to quell a banking panic is to keep the panic to a minimum, everyone knows that.

Is it worth risking all your wealth for the return, whether it’s 4%, 5% or 10%? This is no longer a purely bullish economy. This is a very real bear market as capital in the cryptocurrency space flees faster than ever.

So let me ask again – is this return really worth it?