I remember it as if it were today: a few days after the so-called “dotcom bubble” burst, people who until the day before carried us (they carried us from the first wave of Italian startups) in the palm of their hands suddenly avoided us. A person rather in sight of the Turin that counts(goes), always full of compliments, one morning following the collapse of the Nasdaq, seeing me from afar, he changed sidewalk in an attempt to pretend not to see me and therefore not having to say goodbye, I suppose embarrassment, as if I burst the bubble (LOL).
Overnight we had become lethal
It was amusing to witness all this: it proved that people who are not experts in a given sector – and one cannot objectively be experts in everything – tend to lump everything together when presented with more or less catastrophic news relating to a world specific.
Something like this is happening even now: software developers who until a few months ago would have paid to work in a crypto company today sometimes even avoid interviews, many friends call me scared to make sure “everything is going well”, others to know if the crypto sector is dead and their bitcoins are to be thrown away.
I would like to reassure everyone: everything is fine
Those who, like us, have chosen a model based on transparency in unsuspecting times, see numerous opportunities in times like this. But we know well that it’s not always Sunday and that when it pours, even those well equipped with umbrellas and raincoats can get wet.
The situation, on the other hand, is decidedly worse for those who thought that the sun would shine forever, i.e. most of the CeFi companies, centralized (by definition) companies that somehow use cryptocurrencies, decentralized by nature, to replicate, often in an opaque if not cloudy way, certain models of classical finance.
As we all know, it happened first with Celsius, then with BlockFi, then with 3AC, FTX and Alameda and several others. As I was writing the previous post, I received persistent rumors of growing difficulties for important centralized entities, such as Genesis Trading for example. I decided not to talk about it because the news is one thing and the uncontrollable gossip is another.
Sadly some of this gossip is turning into news as I write, and the news could get worse.
Digital Currency Group (henceforth DCG) owns Genesis Trading and Grayscale, two crypto giants. DCG owes 1.1 billion dollars to its subsidiary Genesis Trading (but someone is talking about half a billion and it is not clear who is right) which, without that money, fails. Because? Simple: it is one of the most important centralized crypto subjects in the world and therefore exposed, for better or for worse, to all the waves of the sector. In this case, for the worse: its balance sheet has collected giant holes due to the collapses of the past weeks and months. And here one thing must be well understood: all these centralized subjects have created over time a sort of informal club, lending each other “money” and thus remaining entangled in a thousand operations (often heavily leveraged) linked to each other: obviously, if one , a little mud ends up on the others and when the mud becomes so much pain for everyone, cascading. Which is what is happening now.
So Genesis Trading, which in the meantime has blocked withdrawals for days, needs that one billion point one (or half a billion), otherwise it fails and drags the whole market along with it. But DCG apparently doesn’t have them. They asked, as everyone always does, for help from Binance, which said no thanks.
In parallel, DCG, as mentioned, is also the owner of Grayscale which operates with two crypto trusts – one in bitcoin and the other in Ethereum – something very close to an ETF: bank customers who do not want to own crypto directly can buy shares of these products and therefore have an indirect exposure to bitcoin and Ethereum. The problem is that the shares of these two Trusts are now worth about 45% less than their assets, a sign that the market must have understood how things are in those parts.
Therefore, if DCG does not find the money for Genesis Trading, the latter could jump. To avoid the crash, DCG could have Grayscale sell part of the 10 billion dollars of bitcoin and 3 billion of Ethereum, i.e. the assets of its two Trusts, which however would put the latter in a rather shocking situation towards its customers. Moral: let’s get ready for another undesirable but possible debacle which, if it were to happen, would create quite a few problems for various other subjects linked at least at an operational level to the companies of the DCG group.
As I write this it is not at all clear what will really happen. The obvious hope is that DCG will find a way to keep his castle from collapsing. But there are many tweets in the opposite direction and they don’t leave you so calm, let’s say. And all this makes and will further decrease the value of bitcoin and its sisters. It could be an epic splash.
So why should I be optimistic?
On Monday, in a beautiful hall of the Chamber of Deputies, I took part in the conference promoted by the Cryptovalues association on the theme: “What rules and conditions for the development of crypto-activities in Italy?”, in the presence of a large part of the exponents of the Italian sector, personalities from the Bank of Italy, Consob, OAM and top managers of major banks. Among the interesting things that emerged, I would like to point out three: the need for transparency and regulation, the hope that the industry will soon find reasons for using cryptocurrencies that go beyond the speculative models underlying the collapses of 2022 and the conviction of some of those present on the fact that the banks will be the ones to “save” the cryptocurrencies, or rather to give them a new impetus, the reason being that no one knows better than the banks the job of validating and calculating risk.
Therefore, if we add these three elements together and press the FF key (fast forward), we could actually find ourselves in a few years’ time in a regulated situation in which investors are more protected than today on the risks associated with their adoption of digital assets and where the main crypto players will be the banks, which will move from the phase in which they avoided or fought digital assets to one in which they will be able to offer them to their customers together with a series of related services, first and foremost custody.
It can be just fine. On the opposite side of this vision, opposite but not antithetical, there will be a significant strengthening of transparent, therefore decentralized, therefore on-chain activities: even if from the outside it may seem the opposite, crypto and DeFi are stronger than ever in their essence of independent entities resistant to censorship.
It is therefore a good thing that the opaque, superficial and greedy subjects are swept away: they reap what they have sown. Sorry for those who got caught in it but, as always in these cases, better late than never.