Ram Ahluwalia Profile picture
Nov 20 29 tweets 6 min read
1/ Genesis is the only full-service prime broker in crypto. Genesis was a gem in the DCG portfolio.

It plays an critical role in enabling large institutions to access & mange risk.

The $1 Bn question - where does Genesis go from here? A thread on Prime brokers & Genesis
2/ What is prime brokerage? A prime broker ('PB') is a dealer that provides three core functions:

i) custody assets
ii) over-the-counter trading (eg, ability to buy/sell securities not-listed on exchanges & blocktrades)
iii) extend credit

May also offer derivatives & research
3/ A prime broker is not dissimilar from your own brokerage firm. You can buy/sell, borrow, go short, hedge, enter a derivative position. The broker charges a transaction fee and is regulated as a broker/dealer.
4/ Differences?

A prime broker faces off with large sophisticated institutions: hedge funds, institutions, sovereign wealth funds, large family offices, and governments.

Examples: Merrill Lynch, Morgan Stanley, Goldman Sachs, Jefferies, Citi Prime Finance, Credit Suisse...
5/Traditional prime brokers offer access to listed securities. They provide financing on these securities using bank financing (e.g., margin lending).

Over-the-counter trading involves non-listed securities. That distinction matters because OTC trades are not centrally cleared
6/Centrally cleared means that there is a clearinghouse where trades are 1:1 matched, netted and settled.

Examples: ICE & CME

The exchange is the buyer to every seller, and the seller to every buyer. Clearinghouses have gobs of capital, tons of regulation, and rock solid.
7/ Prime brokers benefit from an 'inter-dealer market'.

One prime broker can lay-off risk by selling or buying to another dealer.

The OTC desk seeks to run a 'matched book'. A matched book means every position has an offsetting position with another counterparty.
8/ In practice, a matched book in OTC products never truly exists.

There is always an 'Odd Lot' (like the podcast :)

Clients expect a dealer to make a market. The dealer is temporarily taking a side of the trade until they can hopefully find another party to take the other leg
9/ Classic prime brokers have a robust inter-dealer market. That market is essential for OTC products since they are not listed at an exchange or centrally cleared. This means they can avoid taking directional exposure and focus on capturing the bid/ask spread or financing fees.
10/There is an deep ecosystem of CeFi infrastructure that enables these prime brokers and clearinghouses to access and manage risk: FIX protocol (trading API), the DTCC, ISDA frameworks, dealer desks, the Options Clearing Corp, Bloomberg terminals, etc.
11/Genesis was the pioneering prime broker in the crypto category. It doesn't benefit from the liquidity, standards, inter-dealer relationships, clearinghouses, and deposit-financing that traditional prime brokers enjoy.

This has two significant implications...
12) i) Genesis must seek to match duration of its assets (its loans) with liabilities (its borrowings).

A bank can borrow short-term (say, your demand deposit account) and lend at a longer term (say, a 7 year jumbo mortgage). The bank does not need 'term financing'.
13/ A bank-backed PB can tolerate a mismatch in the duration of its assets and liabilities. It has FDIC insurance, a lender of last resort, and a liquid market with standardized contracts.

A non-bank prime broker must seek to 'duration match' both sides of this. Not easy.
14/ Genesis source of funding included borrowing via the Gemini Earn program and the Circle Yield program. These are short-term sources of funding. If those sources of funding dry up, then Genesis is forced to liquidate its loan book (at unattractive prices or not at all)
15/Also, longer-term loans are illiquid and may not be callable or redeemed at par. This exposes Genesis to 'bank run risk'. If everyone withdraws deposits at the same time, Genesis can't liquidate its assets fast enough (due to contracts, operationally, or lack of liquidity)
16/ ii) In the derivatives and OTC book, Genesis is the buyer to every seller and seller to every buyer.
Genesis takes on counterparty risk. Genesis will seek to run a matched book at all time. but if their counterparty (let's say 3AC) fails, then Genesis has exposure.
17/ The counterparty risk exists because i) there is no CeFi or DeFi clearinghouse to sell risk to, ii) and no inter-dealer market consisting of higher quality parties.

Note: TradFi players like Credit Suisse also blow-up even despite this robust infrastructure - see Archegos
18/ A counter-party blow-up means Genesis now has directional exposure and a capital loss. When 3ac blew up, market participants could review the 3ac bankruptcy docket and identify the size of the capital loss. This can cause a loss of confidence and lead to a bank run
19/ The prime brokerage business is an attractive fee machine...provided you have the ecosystem and conditions we discussed earlier. Absent those conditions, it's a fragile business prone to counterparty risk, bank runs, and asset-liability mismatch.
20/ By my rough math and public reporting, Genesis has lost (due to 3ac and FTX counterparty blow-ups) more earnings than Genesis has ever generated since inception.

3ac was allegedly over $1 Bn in losses alone [!]... So where does DCG go from here?
21/ There are two moves. Raise equity at the DCG HoldCo level. Then inject capital into the subsidiary to restore confidence.

But, Genesis is capital intensive. It relies on capital and borrowings to make loans. The ROE has dropped since funding sources have dried. Negative NPV
22/ To truly unlock the potential of Genesis - and fill a needed gap in the market - it needs a cheap reliable source of funding. It also needs much more capital. And it needs an inter-dealer network. The right move for Genesis is to get acquired.
23/ Potential acquirers could be GS, ICE, or a consortium of investment banks. That won't be easy - headline risk, regulatory scrutiny, questions about asset quality, risk-off climate, etc. (MS, Merrill, CS, Deutsche, and Jefferies would not do this for various reasons.)
24/If no acquirer, then DCG would need to plug the hole. But I can't see DCG adding capital to a negative NPV business when rates are high. That would imply an organized bankruptcy at the Genesis lending subsidiary
25/Crypto has greatly benefitted from Genesis as an institution. That can't be understated, and my hats off to the Genesis management team for pioneering. Genesis can be a gem in the right hands.

What do you think? What happens if no parties come to the rescue? Please give a RT!
26/ Listen to this excerpt with the CEO of CME Group (Terry Duffy) - a large clearinghouse share his conversation with @SBF_FTX. SBF declines to have his derivatives centrally cleared. That's a major red flag - this was a gift. So hard to list new products on an exchange...
27/ What's your view? Does Genesis Lending file for bankruptcy? Or does DCG or a White Knight acquirer save the day?

My view: We'll see a bankruptcy filing at the Genesis Lending subsidiary level. Genesis Trading will continue to operate.
The thesis is playing out. The impairment to equity is simply too big. The new money that goes in would make creditors whole first. That hole is significant (3ac $1.2 Bn?). This is the main issue. New capital can’t be deployed to revenue generation.
28/ Excerpt of interview with @laurashin .

You need two data points to determine Genesis Lending solvency: the size of the write-downs and amount of shareholder equity on the balance sheet. That's it...

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Ram Ahluwalia

Ram Ahluwalia Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @ramahluwalia

Nov 14
1/ Why would FTX acquire Voyager and BlockFi if they had no cash and were insolvent?

What were they thinking?

It’s truly Machiavellian. Here’s a thread on my hypothesis…
2/ a) FTX was acquiring their creditors to buy time and slow down a margin call. Recall, it was known that FTX had hundreds of millions in loans outstanding to Voyager.

When you can’t pay off your debt, the debtors wipe out your equity and own your company.
3/ FTX, in a truly Lex Luthor way, sought to buy Voyager to prevent this. The new parent assumes the subsidiary liability

Also, FTX could acquire with their inflated but actually worthless $32 Bn equity. They positioned as a ‘white knight’ when in fact they were the delinquents
Read 13 tweets
Feb 25
1/51 The crypto market has changed significantly over the past year

In this episode of @TheScoopPod, host @fintechfrank speaks to @joshua_j_lim of @GenesisTrading to gains insights to these changes Image
@TheScoopPod @fintechfrank @joshua_j_lim @GenesisTrading 2/51 Key Takeaways

1. Complex products such as crypto derivatives are entering the market
2. The Basis Trade will converge with spot price over time
3. The crypto market is maturing and volatility is decreasing
4. Joshua aims to hire people who can tread between TradFi & Crypto
@TheScoopPod @fintechfrank @joshua_j_lim @GenesisTrading 3/51 Background

• Head of derivatives at @GenesisTrading Image
Read 51 tweets
Feb 11
What are @VitalikButerin’s thoughts on 2021 and the years ahead?

This is part 1 of our @BanklessHQ pod summary featuring hosts @RyanSAdams and @TrustlessState and Vitalik.

In part 1, Vitalik shares the Ethereum roadmap and expanded on the details within it.
@VitalikButerin @BanklessHQ @RyanSAdams @TrustlessState In 2021:

• Was a great year for adoption and mainstream attention
• Fascinated by the rise of NFTs
• Plenty of new people came into the space
@VitalikButerin @BanklessHQ @RyanSAdams @TrustlessState • DAOs experimented with different governance algorithms
• The progress in layer 2 scaling has been amazing
Read 57 tweets
Feb 10
Everyone's favorite funding stat from 2021 is that 1 out of 5 VC dollars went to a #fintech.

What's MORE impressive?

Equity investments in #crypto companies grew 800% year over year - 4x faster than investments in fintech.

Some other notable stats - a 🧵 Image

There are now over 400 DeFi protocols on Ethereum alone, with an aggregate ~$124 Bn in TVL (Total Value Locked).

That's up from a mere $17.5 Bn at the start of 2021. Image

There are close to 3,000 Dapps running on Ethereum - including heavyweights like @opensea, @ensdomains , and @decentraland.

Combined, they processed ~219,000 transactions worth ~$280MM in the last 24 hours.

(H/T @StateOfTheDApps) Image
Read 9 tweets
Nov 10, 2021
Coinbase Q3 earnings are out!

Here's a thread with highlights on the business, product, notable customer wins, and some pretty charts.

I also discuss how Coinbase is betting big on Web3 - this is the proverbial hockey puck Coinbase is skating towards.

Revenues (miss, but up massive YoY): Coinbase revenues for Q3 were $1.2 Bn vs. expectations of $1.8 Bn. Revenues up 4.3x YOY.
User engagement (mixed): Monthly Transacting Users ('MTUs') were 7.4 MM down 16% from a peak of 8.8 MM MTUs last qtr. Still, up 3.5x YoY
Read 24 tweets
Nov 8, 2021
Really enjoyed @brian_armstrong interview on the @BanklessHQ podcast. Here's a thread with the key highlights

Time for a thread...
Brian sees Coinbase as on a spectrum. On one end you have traditional FIs. There are tech companies in the middle. And then there are web3/crypto companies on the other extreme.
Coinbase aspires to be a fully decentralized company. Think here Web3/Dapp a la Uniswap. It's a great aspiration... The hard part is how do you get there as a publicly traded company legally, operationally, customer UX?
Read 19 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!


0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy


3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us on Twitter!