1/ There are a lot of smart VCs concluding the demise of Luna set in motion contagion.


The collapse of the GBTC premium was the main culprit.

It created, for a time, the perception of a perpetual motion machine disguised as a ‘carry trade’…

🧵 #bitcoin pump + Genesis
2/ The trade was:

- buy Bitcoin spot
- Deliver to the Grayscale trust in 6 months (per the rules) in exchange for USD
- Pocket the premium between GBTC and Bitcoin (up to 30%+ for 6 month holding risk)
- Repeat (and add leverage)

You ‘carry’ the GBTC for six months and sell it.
3/ Normally the carry trade refers to FX markets.

HFs would borrow in Japan at nearly 0%, and then lend in a higher interest rate country. The HF bets the FX rates are stable.

Also, HFs would buy bonds yielding 3% and borrow on margin at .5%.

Same idea - spread capture.
4/ This pattern of borrowing with cheap leverage and buying risk assets boosted all asset classes to record levels in 2021.

Crypto assets, SPACs, tech stocks, bonds, and housing were all beneficiaries of ultra low rates and QE.

Inverse price / yield relationship on steroids.
5/ GBTC was a billion dollar trade.

DCG and others spent $750 MM+ buying bitcoin with leverage from Genesis (and BlockFi et al).

This $Bn in purchasing caused a boost in the price of bitcoin to record highs.

That momentum attracted additional buying - FOMO money.
6/ The end of the premium, together with higher rates, caused an unwind in the GBTC and other carry trades.

These mechanisms started to go in reverse. The unwind sent bitcoin on a roundtrip back to pre-leverage lows.
7/ The marginal demand from the largest buyers of bitcoin were no longer buying.

They were getting margin called. 3AC was liquidated.

Animal spirits were replaced with Survival instinct. Fear replaced Greed.

Luna added another narrative violation.
8/ Elimination of the GBTC premium kicked out a major revenue driver for CeFi.

BlockFi, 3AC and other market leaders made hundreds of $MM on it. They raised VC money on an unsustainable and highly risky revenue source.
9/ Many of these crypto banks were actually capital markets businesses in disguise.

They made money on the GBTC premium. Or captured spread as a prime broker.

The ‘cover brand’ looked like a neo-bank app. The internal operations resembled a wall street trading desk.
10/ The end of the GBTC carry trade is similar to the inversion of the yield curve.

The GBTC flip gave crypto investors a 7 mo warning before the Nov 21 peak in asset prices.

Prices and the bear market started 5 to 6 months before Luna collapse.
10/ Side Note: Lumida passed on investing in BlockFi for this reason.

It was easy to see the GBTC trade was the primary revenue driver and that was not a sustainable business model.

Also, the ‘non-bank acting like a bank’ story was a major concern point.
11/ Lumida also called out Celsius CEO Alex Mashinsky in late May at the FinTech Nexus event before Celsius blew up.
12/ When DCG on July 6th announced they were ‘assuming certain liabilities’ in connection with 3AC, we pounced on that back in July.

It’s all variations on a carry trade at work.
13/ GBTC was the first warning sign to reduce risk.

Luna accelerated issues.

But the structural shift started with the GBTC carry trade failing.

This ended layer upon layer of these perpetual motion machines.

It set in motion credit loss & contagion across lending books.
14/ I explain this on @laurashin Unchained podcast releasing this Tue. Stay tuned!

Let’s get the autopsy right to prepare for the next cycle.
15/ If you enjoyed this thread, please give a like and a retweet.

Also follow @LumidaWealth where we focus on institutional grade insight and wealth management (SEC Registered).

Stay tuned for a research drop coming soon re: another key player in the crypto ecosystem.

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More from @ramahluwalia

Nov 30
1/ @andrewrsorkin just wrapped up his interview with @SBF_FTX. I wanted to call out a few snap highlights.

There are some learnings for DCG / Genesis as well.

I highlight a few questions (Q) and answers (A). These are not verbatims. My take is noted in (R).
2/ Q: Alameda paid a $2.5 Bn loan to Genesis. Where did the money come from?
3/ A: Genesis tried to call in a large number of loans from Alameda. That closed down a number of positions between Genesis and other trading desks. Led to an increase of position size in Alameda from FTX in retrospect.

R: This is evasive BS.
Read 12 tweets
Nov 28
1/ What happens to Gemini Earn clients?

I believe there is a credible path to full recovery.

However, Earn clients may face a choice: accept immediate liquidity in the near-term in exchange for a discount, or wait a long-time for full recovery.
2/ Disclosure: This does not represent any legal advice or financial advice. Review your lending agreement. DYOR.

I'm only sharing an opinion. Seek outside counsel.

Also, don't trust random people on the internet.
3/ This analysis assumes Genesis goes thru a Chapter 11 scenario.

There are three factors at play:
- DCG's willingness & ability to raise equity
- Priority of Gemini claims (I don't know)
- The price of GBTC (and by extension - bitcoin)
Read 24 tweets
Nov 25
1/ DCG published a letter to investors. It clarifies several misconceptions. It also raises new questions around the Promissory Note.

I have pored over this and the Grayscale 10-Q to connect some dots. We'll cover what happened and what we learned.

Let's break it down... 🧵
2/ What did we learn?

DCG was levered long GBTC. 3AC blows up. This writedown reduces equity capital at Genesis Lending.

Net net this increases the DCG's already levered exposure to GBTC.

And the more GBTC slides in price, the more DCG's leverage increases.

How exactly?
3/ DCG owes ~$2 Bn to two creditors: subsidiary Genesis Lending and Eldridge

- Genesis Lending. There are two loans a $575 MM loan (loan #1) and a $1.1 Bn loan 'Promissory Note' (loan #2)

- A group led by Eldridge issued a credit facility of $350 MM
Read 21 tweets
Nov 22
1/ Genesis notes their goal is to ‘resolve the current situation consensually’ via ‘constructive conversations with creditors.’

This is a high-stakes gambit and looks like a lose lose situation.

Plot twist: Gemini Earn users could get a Genesis equity airdrop...

2/ Background - you may want to review this thread which explains how a prime broker such as Genesis makes money, and its main sources of risk and funding.

3/ Let's use round numbers. Assume Genesis in July has ~$10 Bn in loan Assets.

Assume 95% of that is funded by Debt ($9.5 Bn), and 5% of that is funded by Equity ($.5 Bn). 20:1 leverage ratio - typical for a non-bank lender.

Assets = Liabilities + Equity
$10 B = $9.5 B + $.5 B
Read 26 tweets
Nov 20
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.
Read 29 tweets
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

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