Genesis bankruptcy documents reveal the truth: Why does GBTC have a nearly 50% negative premium?
Four main reasons have led to the current situation of GBTC.Author: CEO of Lumida Wealth Management Ram Ahluwalia
Original Translation: PANews
Why does GBTC have a nearly 50% negative premium rate? The recently released bankruptcy filings from the crypto lending company Genesis have finally revealed some truths, with the main situation outlined as follows:
Genesis promised to provide GBTC products to Earn users of the cryptocurrency exchange Gemini.
Genesis suspended withdrawals.
Gemini revoked the right to redeem GBTC collateral.
Gemini sold GBTC to private buyers, leading to an expanding price gap.
Was Gemini "unjust" first, and Genesis "unrighteous" later?
According to the information disclosed in the bankruptcy filings, it seems that the cryptocurrency exchange Gemini was "unjust" first, ultimately leading to Genesis being "unrighteous." Let’s analyze the entire event 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, which included a commitment to purchase $465 million worth of GBTC, buying 31 million GBTC shares for $1.506 billion.
For Gemini, this transaction carried risks. Their risk manager for the Gemini Earn yield product had requested Genesis to provide collateral as soon as possible: "Hey, Genesis, we (Gemini) have a lot of unsecured risk assets, so hurry up and send us the collateral."
The concerns of the Gemini risk manager were not unfounded, mainly for three reasons:
Increased counterparty centralization risk.
Genesis's unpaid loans began to accumulate.
Potential risk spillover from Gemini.
No one wants to become the next Three Arrows Capital.
(Note: Three Arrows Capital had borrowed up to $2.36 billion from Genesis, accounting for nearly 50% of Genesis's total loans. Data shows that the loans provided to Three Arrows Capital were supported by approximately 17 million shares of GBTC.)
On November 7, 2022, Gemini and Genesis modified the collateral agreement, agreeing to extend the repayment period to give Genesis more time to repay Gemini Earn creditors.
On November 8, 2022, the cryptocurrency exchange FTX announced a halt to withdrawals. Despite prolonged negotiations between Genesis and FTX, FTX's eventual implosion left Genesis with no hope of recovering its funds.
On November 10, 2022, Gemini and Genesis made a second amendment to the collateral agreement. This time, Digital Currency Group (DCG) was involved and became part of the collateral agreement. DCG intervened mainly to help Genesis by pledging another 31 million shares of GBTC.
On November 16, 2022, Genesis announced a suspension of withdrawals. On the same day, the cryptocurrency exchange Gemini began to sell off GBTC collateral in private sales (indicating that Gemini did not comply with the requirements of the revised collateral agreement from November 7), selling at a price of $9.20 per GBTC share, totaling 30.9 million shares, and using the $284.3 million in proceeds to repay debts after deducting the costs and fees of revoking the collateral redemption rights. ------ On November 7, 2022, just nine days prior, the price per share of GBTC was $12.15, meaning Gemini sold GBTC at a 25% discount, and the scale of the sale accounted for 5% of the total circulation of GBTC.
From the chart below, we can see what happened on November 10, 2022, and November 16, 2022. November 10 was the date for the return of GBTC collateral, while November 16 was the date Genesis announced the suspension of withdrawals and the cryptocurrency exchange Gemini began liquidating GBTC. After Gemini's discounted sale of GBTC, some private buyers began shorting or selling GBTC in the open market to hedge risks, resulting in the negative premium rate further widening.
This discounted sale of GBTC brought Gemini $284 million in proceeds, after which Gemini informed Genesis about the foreclosure and sale situation. However, Genesis believed that Gemini's foreclosure and sale of GBTC seemed unreasonable under commercial rules (even though the relevant transactions were completed after notifying Genesis) and raised objections (Note: At this point, DCG and Genesis were already very dissatisfied. Michael Leto, Managing Director of the restructuring consulting firm Alvarez & Marsal North America, revealed that Genesis pointed out that Gemini's foreclosure operations on the collateral were not applicable under legal rules).
It is important to note that at this time, Genesis still had not delivered the "second batch" of GBTC collateral promised to be returned to Gemini, which should have been delivered to Gemini by November 10, 2022.
Moreover, the controlling shareholders of GBTC, Genesis and Digital Currency Group, cannot simply "sell off" their holdings to raise more funds, as per Section 144A of the 1933 U.S. Securities Act, the issuer of over-the-counter or off-exchange trading entities must notify in advance of the proposed sale, and the sales limit of issued shares or weekly trading volume can only account for 1% of the total shares. According to regulations, GBTC holdings will be considered "restricted securities."
Therefore, the details disclosed in Genesis's bankruptcy filings indicate that the cryptocurrency exchange Gemini's choice to sell GBTC at a discount, contrary to the revised agreement between the two parties, may have been the trigger that caused the fund's negative premium rate to continuously rise and reach a historic low of "-50%."
Did Gemini's early cash-out ultimately lead to losses?
The subsequent story is likely known to many------Gemini co-founder Cameron Winklevoss and DCG CEO Barry Silbert publicly clashed on social media, followed by Genesis filing for bankruptcy…
"Interestingly," in Genesis's bankruptcy reorganization plan, they designated Gemini and its Earn customers as "Class IV unsecured creditors," ranking them below Genesis's institutional creditors, secured creditors, and those holding priority claims. This may express Genesis's strong dissatisfaction with Gemini's previous actions. It is important to note that the ranking of creditors is crucial in determining how much each class of creditors can ultimately recover through the bankruptcy process, and Gemini and its Earn customers, as "Class IV unsecured creditors," may mean that even if the court supports Gemini and rules that the exchange is entitled to claims, they may not necessarily receive compensation, as this is bankruptcy, and no one can ensure there is enough money to compensate creditors, let alone lower-tier creditors.
Now, it is believed that everyone can understand why, after the news of "Genesis officially filing for bankruptcy" came out, Cameron Winklevoss immediately took to social media to announce that he would take direct legal action against DCG and its CEO Barry Silbert, stating------"Unless DCG can provide a fair solution, Gemini will immediately sue DCG and its CEO, and Gemini will use all available tools in bankruptcy court to maximize recovery for Earn users."
Overall, it is currently difficult to determine the rights and wrongs between Gemini and Genesis, as it seems reasonable for Gemini to sell GBTC at a discount to protect its own and Earn customers' interests (despite legal disputes). However, Genesis's bankruptcy filing may have caught Gemini off guard, as for Gemini and its Earn customers, they must face the reality: they have become Genesis's largest creditor but are not the highest-ranking creditor. In other words, Gemini may never be able to recover compensation, and even if they can, they may have to wait a considerable amount of time.
