Key Takeaways
- Genesis Capital is the latest firm to be caught up in the crypto crash, suspending withdrawals yesterday.
- Gemini quickly followed and paused withdrawals from its Earn product.
- These are yield-generating services — very different from what happened at FTX.
- FTX’s major wrongdoing was posing as an exchange while operating like a hedge fund, gambling with customers’ assets.
- All yield-generating products face enormous risk right now, our analyst warns.
The dominoes keep falling, triggered by the ongoing FTX saga.
Major crypto lender Genesis Capital suspended withdrawals from its lending business yesterday. If there’s one lesson crypto investors have learned recently, it’s this: once a platform pauses withdrawals, the situation is almost always dire.
This is not trivial. Genesis reported active loans worth $2.8 billion in Q3 2022, down from $8.4 billion earlier in the quarter — a substantial amount of exposure.
In my post last week, where I examined what might come next for cryptocurrencies, I discussed the inevitable contagion.
“Expect some contagion to emerge from all of this, since we don’t yet know who was exposed to whom — but FTX, as a major industry player, will undoubtedly pull a few bodies down with it.”
Well, to paraphrase a well-known Drake line, “bodies are starting to drop.” It’s no longer a matter of if, but who.
Who Will Fail Next?
Genesis said it paused its lending operations due to “abnormal withdrawal requests that exceeded our available liquidity.” That explanation signals deep stress.
The ecosystem is — and will continue to be — tested to the limit. Let’s linger on Genesis a bit longer: it’s a key player in lending, and one of its partners is Gemini, which offered the yield-generating Earn service. Gemini — the exchange run by brothers Tyler and Cameron Winklevoss — suddenly had customers worried.
A few hours after Genesis’ announcement, Gemini issued a statement saying withdrawals from its Earn program were suspended. The move was unsurprising given the circumstances.
“We are working with the Genesis team to help our customers receive their funds from the Earn program as quickly as possible. We will provide more information in the coming days,” Gemini said.
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 customer redemptions within the service-level agreement (SLA) of 5 business days. https://t.co/9e48pF3Ymn
— Gemini (@Gemini) November 16, 2022
These firms now join BlockFi in suspending withdrawals as another crypto lender scrambles in the aftermath of the FTX collapse. Reports indicate Genesis may lay off staff and could be preparing for bankruptcy filing.
How These Situations Differ from FTX
There is a big distinction between what’s happening at these companies and what happened at FTX. Yes, these businesses often practiced reckless risk management, lacked diversification, and brought much of this on themselves. But FTX’s failure was different in kind.
As Sam Bankman-Fried himself hinted in his rambling threads — which only added fuel to the fire — “this risk was correlated — with the other asset and with the platform. And then the collapse… and people fled toward the exit.”
You don’t need to be a genius to see why. Cryptocurrencies are highly correlated and extremely volatile. If your portfolio is 100% crypto, you should not be surprised when severe downturns hit.
That is exactly what happened with BlockFi, Gemini Earn and similar products — much like Voyager Digital, Celsius, and the other companies that promised yields in exchange for customers’ assets.
Investors are waking up to the fact that these platforms are risky. Every cent you deposit can be exposed to disappearance risk.
FTX, however, was not just another yield platform. FTX presented itself as an exchange. Here’s the puzzle: how does an entity that is not a bank fail during a bank-style run? I keep stressing that FTX was an exchange because that distinction matters. Customers should be able to deposit fiat with exchanges, leave it as cash, or use it to buy crypto. When they withdraw funds, those funds should simply be there.
An exchange should earn revenue through trading fees, deposit fees, and similar charges. It should not act like a reserve bank — passing customer deposits to an affiliated trading firm and then gambling with them.
Customers may have understood the risks at BlockFi and others, but they did not expect that from FTX. That’s why the anger is so intense. It feels fraudulent. I’m not making legal claims — only noting that while Sam may have tried to avoid direct legal violations, the optics and the consequences are devastating.
What Happens Next?
$8 billion in cash doesn’t vanish without causing wider problems. Genesis is a significant pain point, but more failures will likely follow. That’s why I’m surprised Bitcoin has held up as well as it has.
The pain won’t stop here. As I discussed yesterday, this is not only a massive liquidity drain; Bankman-Fried had interests across many other entities, creating multiple points of contagion.
If you’re still invested in yield-bearing crypto products, you should be very worried. When Terra collapsed, these platforms presented a risk-return profile I could no longer justify. Management teams will insist they are sound — the same claims were once made by Celsius, BlockFi, and others. The key to preventing a bank run is minimizing panic — and these organizations know that all too well.
Is a promised yield — whether 4%, 5% or 10% — really worth risking your entire holding? This is no longer a one-way market. We are in a real bear market, and capital is fleeing crypto faster than ever.
So I’ll ask again: is the yield truly worth it?