Even since the crypto peak at the end of 2021 not only have cryptocurrencies had a bad time of it but decentralized finance businesses have been going bankrupt. The most recent is Genesis which is having trouble financing its debts and may soon be looking for protection by the bankruptcy court. Why have companies like Genesis gotten into financial trouble when the concept of decentralized finance is, by itself, so promising? Some of the reasons will likely become clearer during bankruptcy proceedings much like FTX’s problems have seen the light of day during their bankruptcy hearings. With the Genesis DeFi business headed for bankruptcy following others it is useful to look for lessons.
Who or What is Genesis Global Capital?
Genesis Global Capital, the guys who may be soon filing for bankruptcy protection, are the crypto lending unit of Digital Currency Group. Digital Currency Group is a venture capital firm. Digital Currency Group has stopped paying dividends across all of its subsidiaries because Genesis Global Capital owes about $3 billion to creditors. According to their website, Digital Currency Group accelerates the development of decentralized finance (a better financial system) by building and supporting Bitcoin and blockchain companies by leveraging their network, insights, and access to investment capital.
Too Much Leverage During Crypto Winter
As we look at the crypto exchanges and DeFi businesses that have collapsed during crypto winter we see a common business approach that went wrong. The world of cryptocurrencies had gotten into a rhythm. Impressive upward spikes were followed by slightly smaller downward plunges only to be followed by more impressive upward spikes. This pattern only lasted a few years from 2017 to 2021, but in the young world of cryptocurrencies it seemed like forever. Companies that leveraged their investment capital were rewarded time and time again. Borrow in dollars, invest in crypto tokens, watch the value of the crypto tokens soar in dollar value and repeat. That business model worked great until it didn’t. After Bitcoin peaked (at $67,000) along with the rest of the crypto world in November of 2021 multiple crypto businesses borrowed to make ends meet as they waited for the next crypto peak that never came.
Federal Reserve Rate Increases Drive Stock Market and Crypto Down
Thanks to hefty government Covid spending by two presidents and to sessions of Congress, investment in US infrastructure, incessant Covid lockdowns in China, and then the Russian invasion of Ukraine, the world saw the worst inflation in four decades. The response of the US Federal Reserve, once it go going on the issue, was to steadily raise interest rates and cut their balance sheet in order to cool the economy and thus reduce inflation. Stocks fell and cryptocurrencies did worse. Despite prophecies by crypto enthusiasts that crypto would maintain its value despite inflation, war, social unrest, and recession, it didn’t. It tracked up and mostly down with the Nasdaq. When it departed from that track it was because a major crypto business went bust. Thus Bitcoin experienced a set of successively lower price plateaus. All of this time crypto exchanges and DeFi operations were betting on another crypto price surge that never materialized.
What Is Happening to Genesis?
Looking back, the pressure on Genesis and all of the Digital Currency Group started with the collapse of the Three Arrows Capital hedge fund after the collapse of the Luna and TerraUSD cryptocurrencies and finally got a lot worse with the collapse of FTX. The problem with Genesis and others was not just that they believed crypto would go up forever against the dollar but that they borrowed from or invested their crypto token with other crypto businesses that had similar issues of poor liquidity and insufficient transparency. Thus, the collapse of one DeFi business or crypto exchange weakens others and that successive weakening leads to more bankruptcies. The crypto world has lost more than two-thirds of its value since November 2021. When that happens to a business sector some businesses simply shrink and eventually grow again and others go out of business making room for others when conditions improve. Which category Genesis falls into will only become clear over time.
Genesis DeFi Business Headed for Bankruptcy – SlideShare Version
Genesis DeFi Business Headed for Bankruptcy – DOC