Over the last year, numerous things have gone wrong for the crypto industry. (Too many to list.) But one thing we've learned is that there's an incredibly high degree of interconnectedness between various firms, all borrowing and lending from each other in a way that created a tremendous amount of fragility. A key entity in all this is GBTC, the Grayscale Bitcoin Trust, which was one of the first regulated entities that allowed ordinary investors to get Bitcoin price exposure. Over time, this trust turned into a behemoth, with numerous players making massive leveraged bets on it. On this episode, we speak with Ram Ahulwalia, the CEO of Lumida Wealth, who explains how the fund is structured, how the trade worked for investors, and why it's ended in tears for so many players. This transcript has been lightly edited for clarity.
Key insights from the pod:
Who are the key players? What is GBTC? — 3:53
GBTC as the ultimate carry trade — 7:29
GBTC and Hotel California — 8:46
How much was DCG/Grayscale earning from GBTC? — 11:18
The relationship between GBTC and Genesis? — 12:48
The role of Gemini — 15:31
Why didn’t the SEC act sooner? — 16:58
What could Grayscale do to close the NAV discount of GBTC? — 20:20
Non-banks in crypto — 22:17
Who was doing the GBTC trade? — 23:24
Can crypto exist with yield-generation mechanisms? — 24:20
Will the GBTC premium ever return? — 26:51
Genesis as the ultimate shadow bank — 27:52
Chapter 11 bankruptcy and what to watch — 29:50
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Joe: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
Tracy, a lot has gone wrong for crypto in the last in the last year or so. Let's start there. I think that is safe to say -- that there are many different scandals, blowups, disasters, etc.
Tracy: (00:31)
The background to that intro was, right before Joe said it, he was going ‘how am I going to start this one?’ And he just went with ‘bad things have been happening,’ right?
Joe: (00:39)
We could just list them. We don't need to do that, right?
Tracy: (00:42)
No, but, okay. So one of the bad things that has been happening in the crypto industry has to do with several high profile entities. And I'm still trying to wrap my head around the relationships between all of them, but we need to talk about what's going on with Grayscale, Genesis and Gemini.
Joe: (01:00)
Right. So for a long time, you know, there's no Bitcoin ETF in the United States. For a long time, buying Bitcoin might have been a little tricky. Maybe people didn't want to trust like some of these online exchanges, some of them for good reasons. If you were some sort of regulated entity like a fund or something, or an advisor, you might not be able to get your client money into Bitcoin itself. So GBTC, which is this entity owned by Grayscale, was one of the regulated vehicles [through which] one could get exposure to Bitcoin.
Tracy: (01:33)
Right. But [it’s] not an exchange-traded fund – importantly. It was, well, the Grayscale Bitcoin Trust, I think it's called. And because of its existence, we saw this trade that it really seems like a lot of people in the crypto world were doing, where they would basically borrow Bitcoin, deposit those with Grayscale in exchange for GBTC shares, and then eventually they would sort of offload those shares to retail investors. But that only works as long as there's interest in Bitcoin and the price is kind of going up. And now that everything seems to be going backwards or exploding in various ways, it's become problematic. And now we have this huge discrepancy between the value of Grayscale's Bitcoin and where the shares are actually trading.
Joe: (02:22)
So this is really interesting. For a while, the Grayscale Bitcoin Trust -- GBTC -- and it's traded, quotes all day. There was a large premium to the underlying Bitcoin that it held. And now there is a big discount. And the key thing is that all of these entities that were in some way trying to arb the spread or trading Bitcoin versus GBTC, etc., they've now lost a lot of money. And I think, you know, I mentioned at the very beginning there have been a lot of disasters in crypto, but I think GBTC is at the center of many of them.
Tracy: (02:57)
Yes. Everyone seems upset about this and you know, I've kind of been following it a little bit, but not that much. And so I am very interested to pick apart the relationships between these various entities. Like why is Gemini that involved with Genesis? And how does it involve Grayscale as well?
Joe: (03:14)
You know, superficially this is a going to be a crypto episode, but really it's a fund structure episode. More than anything else. It could be anything, but it happens to be a trust that owns a lot of Bitcoin. Anyway, we need an expert here who's going to explain what was the GBTC trade that so many different entities get into, to get so much trouble, all these new disputes. I'm very excited. We are going to be speaking to Ram Ahluwalia. He is the founder of Lumina, which is a private wealth advisor. He knows a lot about this stuff. So Ram, thank you so much for coming on Odd Lots.
Ram Ahluwalia: (03:49)
Thank you for having me.
Joe: (03:51)
What is GBTC?
Ram: (03:53)
So, GBTC is the security issued by Grayscale. It is a security that trades on the market and right now it has a discount to the net asset value. And that net asset value is based on the value [of the] Bitcoin held by the trust. GBTC is issued by Grayscale, which is a wholly owned subsidiary of Digital Currency Group.
Tracy: (04:18)
And what's the relationship between Grayscale and Genesis and Gemini? Let's just name all the players at the beginning.
Ram: (04:27)
We’ll introduce the cast of characters. So first off, you've got Digital Currency Group founded by Barry Silbert, was and is a storied institution. Really one of the blue chip firms that also seeded and invested in quite a few companies in the category. So DCG created a business called Grayscale, and Grayscale was the first to issue a publicly exchange-traded security that represented access to Bitcoin. It was wildly successful. Also, DCG created the first prime brokerage for the category. And that prime brokerage is called Genesis. So what does Genesis do? It performs custody, it enables trading, and also provides financing for digital assets including GBTC..
Joe: (05:12)
Hmm. What is GBTC? So it's not an ETF, it's an entity that owns a bunch of Bitcoin and there are shares. What is it?
Ram: (05:20)
That's correct. It's not an ETF. You can analogize it to a closed-end fund, although that's not what it is either. But essentially it's a security that trades in the market. It's issued by a trust. And the value of that security in principle should be based on the value of the collateral backing the trust, which is about $10 billion worth of Bitcoin. It's not an ETF because there's no dynamic, instantaneous -- what's called the creation redemption mechanism, whereby market makers perform open operations to ensure the NAV is close to the value of the GBTC.
Tracy: (05:54)
So maybe talk to us a little bit more about the differences between ETFs and a trust structure. What are the key differences and what is it that seems to be problematic with a Bitcoin-based ETF, but is allowed to happen with a Bitcoin-based trust?
Ram: (06:10)
Sure. So in an ETF, you have market makers that are ensuring that the value, the net asset value of the fund matches the tradable value of the security and arbitrage enforces that.
Tracy: (06:23)
So the authorized participants, so typically banks who are incentivized, if they spot a discrepancy between the value of the underlying basket of whatever, in this case Bitcoin, and the shares, they would buy a basket or sell a basket and take it to the ETF issuer.
Ram: (06:39)
Exactly right. Okay. Now, the SEC was not authorizing ETFs backed by Bitcoin. So what Grayscale did was they issued GBTC in a trust format. So you can think of it like a closed end fund, which are out there. And closed end funds generally trade at a discount to the net asset value.
Joe: (07:00)
So you have all these entities, there's been a million filings for ETFs and they tend to go in waves it seems like. And then every six months or something you get a bunch of denials. Meanwhile, GBTC has existed since it looks like early 2015. This thing has just been like a huge money maker because as the one sort of traded vehicle that's Bitcoin-ish, that offers Bitcoin exposure, almost a monopoly, how much of a moneymaker was this business?
Ram: (07:29)
Yes. GBTC was the ultimate carry trade and it generated hundreds of millions of dollars, over billions of dollars for the issuers and parties that have participated in the trade. So at the time when GBTC launched its premium above the value of the underlying Bitcoin, held in the trust, the premium fluctuated between 30% to 50% for several years. So if you engage in this carry trade like Tracy outlined, meaning you buy Bitcoin, you convey and deliver it to Grayscale in six months, but you're wearing the price risk at the time of delivery. So if that premium has held firm, then you capture the value of the premium relative to the spot price of Bitcoin. That discount started to appear, really the premium went to a discount with Coinbase going public -- around that time.
Joe: (08:21)
But, sorry, just to go back for a second. You say unlike an ETF, there's no like automatic redemption back and forth. But traders were able to buy Bitcoin and then create GBTC. So it was allowed, there was one direction you could take it but not the other way?
Tracy: (08:40)
Yeah. This is what I don't get, so you could create GBTC shares but they can't be destroyed?
Ram: (08:46)
Correct. So GBTC, Grayscale has this kind of Hotel California dynamic. The way it works is you've got to go through a deliberate set of procedures to acquire Bitcoin, create a legal entity, notify Grayscale, and go through a set of mechanics to then capture the premium on the other side and hope it's there.
On the redemption side, there is a mechanism to redeem out of trusts. It's called RegM. It's one of the statutes in securities laws, and trusts have offered liquidity to investors. However, Grayscale received a letter from the SEC saying that they cannot engage in ETF-like practices. And Grayscale interpreted that and said, ‘oh, the SEC is telling us we cannot utilize RegM to create liquidity. And then they modified their trust to expressly prohibit themselves from invoking RegM. Although other parties are saying, ‘no, no, no, you can actually use Reg M,’ they're reading too much into the SEC action and accusing Grayscale of self-dealing trying to keep this cash cow.
Tracy: (09:48)
Right. So this is part of the controversy that we're seeing unfold now. But setting the controversy aside for one second and who's mad at whom, what was the exit plan here from Grayscale itself? Like what exactly did they expect to be the outlet for redemptions if there was a bunch of selling pressure.
Ram: (10:07)
The path to liquidity would simply be selling the GBTC. So the secondary market would provide the liquidity. There's no mechanism to enforce the discount to close because RegM is not utilized. That's it. So you're betting that this will trade at some correlation to the underlying collateral.
Joe: (10:45)
You mentioned the perception out there of self-dealing, or reading too much into the SEC. And I'm not going to ask you to like render a legal judgment, but can you clarify when these counterparties are concerned that Grayscale is too conservative about it, and the claim is that this is a huge fee collection entity for them, right? What are the, I don't know, does it have fees in the same way a typical fund has? Like how much does Grayscale get every year from the amount of Bitcoin held in their NAV?
Ram: (11:18)
Absolutely. Let me walk you through that. So Grayscale files quarterly public 10-Qs and you can see the revenues that they generate. And today Grayscale is generating probably around $300 million in run rate revenue based on the prevailing price of Bitcoin. If you assume a 65 profit margin, which seems reasonable, they could be clocking it around $170 million give or take, in terms of net income. I should also point out that the revenue that Grayscale generates is proportional one for one with the price of Bitcoin. So DCG raised through private financing in November, 2021 at a $10 billion valuation, they top ticked the market, that was the exact month that Bitcoin hit their peak value as well. And the way Grayscale generates revenue is they have a 2% management fee. So it's 2% times the value of the underlying Bitcoin collateral, not times the traded value of the GBTC.
Joe: (12:18)
Right.
Tracy: (12:19)
So I mean they were basically printing money when Bitcoin was going up, which is kind of funny because all the Bitcoin purists complain about the Fed printing money.
Joe: (12:27)
But they're still printing money, right?
Ram: (12:29)
Yes. They're making money. Absolutely. It is the cash cow, however then other parts of the DCG business are feeling stressed.
Tracy: (12:36)
Right. I think this is the cue maybe to talk about Genesis and the relationship with Grayscale, because my understanding was that a lot of these market participants who were borrowing Bitcoin were often doing it through Genesis.
Ram: (12:48)
Absolutely right. So Genesis was the world's leading crypto prime brokerage. And what does a prime broker do? They enable lending, custody and trading in an institutional manner. So Genesis enabled hedge funds like Three Arrows Capital to borrow Bitcoin and GBTC and other tokens in size. And Genesis also enabled other non-bank to participate in the grayscale trade
Joe: (13:16)
So BlockFi, one of the entities that sort of, I guess, blew up over last year. How much was the Grayscale trade the business of BlockFi?
Ram: (13:27)
Grayscale made over a hundred million dollars in revenue, and perhaps a lot more than that, through the GBTC trade. What's really interesting about BlockFi is that on the surface it looks like a crypto neobank, a slick app. Behind that surface, it's actually a capital markets and trading business with skillful individuals that were participating in this GBTC trade using their client funds.
And that revenue-generating machine of GBTC enabled the growth of the crypto CeFi sector. It was a major driver of revenue. And when that premium flipped to negative, it’s similar to the idea of the yield curve going inverted. A key leg or prop supporting these business models was kicked away. And these businesses had to pivot to find other sources to generate revenue, including lending.
Joe: (14:28)
I think this is really important here because in the beginning when you talked about the creation of GBTC shares, there was a full legal process, and this I guess I hadn't appreciated. There was a whole process you had to set up, set up a relationship, set up a corporate entity, etc.
So one way to think about these sort of like crypto CeFi entities, whether it was BlockFi or Celsius etc., was they did that, they set up that entity and then as long as there was that premium -- doesn't really matter the price of Bitcoin -- as long as there was some premium that existed between GBTC and BTC, they could use that legal structure that they had made to take in money by Bitcoin and attempt, I don't know, arb isn't the right word, but exploit that spread.
Ram: (15:13)
Exactly right. They're wearing the risk of whether that premium will maintain at the time of delivery.
Tracy: (15:21)
So how does Gemini play into all of this? Because you know, we mentioned people being upset about various things here and the Winklevoss twins certainly seem to be upset.
Ram: (15:31)
Right. So Gemini, of course, is one of the United States' largest crypto exchange. It’s competing with Coinbase. People in crypto want yield. That's what the lesson is from Celsius, it’s the lesson from BlockFi, lesson from Voyager. People want to earn high yield in a then zero rate interest environment and Gemini spotted the opportunity and they created a program called Gemini Earn.
And in that program the creditors face off with Genesis. So Gemini offered the ability for retail investors, accredited investors and institutions to make direct loans to Genesis. Gemini was acting as an agent, they weren't taking credit risk themselves. They didn't put Genesis loans on their balance sheet. They were really like an offerer of this program. Marketing agent
Joe: (16:20)
You know, at one point Coinbase had this thing, they were going to do an earn thing and then they're like, ‘oh, we got a letter from the SEC, they're not going to let us do it.’ Was that going to be roughly the same style of business?
Ram: (16:31)
Similar, yes. So the SEC, it's been reported, threatened a Wells notice and Coinbase stopped. Also recall the SEC did fine BlockFi for a similar program, a hundred million dollars. Again, what was BlockFi doing? BlockFi was paying out interest and there was no registered securities offering. If you want to pay out interest or you want to rehypothecate a deposit, you have to be a bank. Only banks have exemptions from securities laws.
Tracy: (16:58)
So on this note, another bad thing that has happened in the crypto space recently is that Gemini as well as well as Genesis have been sued by the SEC over this Earn program that you just described, basically for breaking securities rules. And one of the criticisms that we've seen online, from I guess investors who were probably burned by some crypto things is, well why didn't the SEC say something sooner? You know, they knew that these companies were doing this program, they'd maybe issued warnings to BlockFi, things like that. What's the rationale for that? Why wouldn't they have moved sooner?
Ram: (17:33)
Sure. So first, Tracy's going to put me in the uncomfortable position of defending the SEC here.
Tracy: (17:38)
I only asked the tough questions.
Joe: (17:39)
Shredding your reputation on Crypto Twitter.
Ram: (17:41)
Let me do my best here. So the SEC has indicated through public statements and enforcement actions including on BlockFi, that they perceive exchanges offering unregistered securities to the public. So they're trying to say, ‘Hey guys and gals, clean up, otherwise we're going to have enforcement actions.’
That's one. Second, is the way to think about the regulators, a metaphor to use here is like the firemen. Okay? So if there's a fire in the house, you call the regulators, you file a complaint, you say, ‘Hey, protect me.’ The firemen show up, the house is already burned down, but there's probably a safe with some assets in the basement. And then what do the firemen do? They'll say, ‘did you adhere to your building code standards?’ For example, that would be, ‘did you have sufficient disclosure?’ Did you say ‘may lose value’ in bold old caps? And that's not on the loan agreement, for instance.
The SEC will say, ‘okay if you complied with the building code standards, then you probably aren't going to get a penalty because bad things happen.’ Also, if you had a legal opinion, meaning you had an inspector show up and said you're doing things by the code, you're going to have less liability. But that's what happens here. And the reason why that's the case is the SEC regulations, American securities laws are grounded on a disclosure framework. It's not a licensing regime like banks.
If you're at JP Morgan, there are dozens of regulators that are onsite that can access books and records. They have to prove new products. There’s stringent controls. Whereas in the American capital markets, what drives entrepreneurship is you don't need a chief compliance officer or a lawyer on staff to raise capital or be in business. That is the trade-off of the American approach to capital formation.
Joe: (19:32)
There's just an expectation of disclosure.
Ram: (19:34)
There's an expectation of compliance with the law. Right. So the SEC will show up after usually a mistakes happened, and they'll start to take names and take actions and try to set an example for others in the industry. And that's why they put these public releases out saying ‘we took action. Here's a fine, everybody else better clean up’ because the SEC can't truly police the category. They've got to find examples.
Joe: (19:58)
And remind me, what was the peak of the premium that GBTC was to Bitcoin? Like 50%?
Ram: (20:04)
Yes, it got up to 50%
Joe: (20:04)
And then it got recently down to like a 50% discount or pretty close to that. It's bounced back a little bit. We've had this rally. Are there steps that DCG could take right now to close that NAV but that would come at the expense of fee generation?
Ram: (20:20)
Yes. Grayscale could utilize the Reg M redemption. First, they'd have to modify the provisions of the trust to enable them to do that. And then they could redeem out Bitcoin and that would close the gap dramatically. Here's a trade-off though. DCG has $10 million, or around 10% of the GBTC issued, excuse me, $61 million GBTC on their balance sheet as of September 30th reporting. Now they might have sold some since that time that could have caused the discount to widen.
So it would help DCG’s holdings of GBTC because they would also double in value if that gap closes. But they will lose the fee-generating potential from owning the Bitcoin. And the right move if you’re DCG in a self-interested capacity, is not to permit that. You're better off taking the unrealized loss on the GBTC held and maintain the fee generation.
Tracy: (21:20)
What does it mean for Grayscale and the Bitcoin Trust that Genesis has experienced so many problems? Because didn't they suspend withdrawals at some point?
Ram: (21:32)
That's right. So Genesis, a few weeks after the FTX collapse, after reassurances to investors, including repping to the solvency of their business, suspended withdrawals. And if you take a step back, this is another common theme in the category, is this pattern of non-banks acting like banks. And of course Tracy, we saw this in the FinTech lending category as well. But what do I mean by that?
Tracy: (21:58)
Yes, for our listeners, Ram and I go way back to FinTech and peer-to-peer lending, which is when we first started talking. And there’s a lot of overlap, actually, with crypto.
Joe: (22:04)
Maybe one day we’ll have Ram back for my dream episode, for the ‘What is FinTech?’ episode, that I always wanted to do. Because I still don't know what FinTech means. But that's another one.
Ram: (22:17)
So what is a non-bank doing here? Non-bank is taking short-term liquid deposits. That's what we call a demand deposit. You can go to your bank and say, ‘Hey, I want my funds back.’ When you go to your JP Morgan checking account and it says you've got $10,000 there, those dollars aren't actually there. They're being lent out on the other side. And banks can pull that off because they have two things: FDIC insurance, to guard against a bank run, and a lender of last resort.
But it's a great business to borrow short and lend long. That's what banks do. And that's what these non-bank, including BlockFi, Celsius, Voyager, and now Genesis have done. They're borrowing short-term liquid deposits that are callable. They can be redeemed whenever the client wants. But they're lending against long-term, long duration assets that are illiquid, not marketable securities. So when you get a run on the bank, then you can be caught off sides.
Joe: (23:24)
All right. So we mentioned BlockFi, Celsius. Who else? 3AC [Three Arrows Capital]? Were they doing the GBTC trade in some version?
Ram: (23:34)
Yes. 3AC was maybe the biggest bettor on this GBTC carry trade
Joe: (23:41)
Voyager. Were they doing it?
Ram: (23:42)
It's not clear whether Voyager or Celsius was, BlockFi was.
Joe: (23:46)
Just on 3AC specifically, because they were not like one of these CeFi FinTech things. So how were they going about the GBTC trade?
Ram: (23:55)
So they were borrowing leverage from Genesis. And, of course, DCG was doing the same trade. We can circle back to that, as well. And that's what's created issues with the DCG balance sheet. But essentially what Three Arrows Capital, as a hedge fund [was doing], they were buying GBTC on leverage when the discount was around 20% to 25%, betting that that discount would close.
Tracy: (24:20)
I have an existential question based on all of this, which is, you talked about how the people in this space really cared about yield at a time when interest rates were very low. And this is a theme that's come up on the show quite a lot, which is in crypto there are lots of very creative and at times ingenious ways to manufacture yield. But it all seems to come from some form of self-dealing within the crypto space. Is crypto going to be able to maintain those yields going forward? You know, in a world where there is now a lot of doubt and cynicism about the space and still a big question mark over whether or not there is an actual use case for the underlying technology?
Ram: (25:07)
Great question. So first off, in crypto, if you don't know where the yield is coming from, you are the yield. The yields in crypto have dropped dramatically because the primary driver of yield generation was the demand for leverage. So if you are on tokens and protocols like Aave and Compound during the heyday, the yield generations were relatively attractive as compared to 0% interest rates in your bank.
What you're seeing now though is the crypto ecosystem and entrepreneurs are adapting, for example, you're starting to see tokenized real world assets on chain, which I'm very excited about. You're seeing t-bills on chain. So crypto natives that want to have a non-custodial, non-banking bankless experience can access yields on chain. I'm not endorsing that, by the way. It's still early days. I've seen some of these tokens offer greater yield than t-bills. I don't know how they do that.
Joe: (25:59)
That's trouble. That's trouble. That sounds like trouble. I have another question about the premium or the lack of premium for GBTC relative to BTC. So as we mentioned, you know, GBTC launched in 2015. It was very difficult in those days to get Bitcoin price exposure. It's become a lot easier. Going forward, let's say there's another sustained Bitcoin bull market. I don't know like if GBTC would ever go back into premium again. But it is much easier to buy Bitcoin or get Bitcoin exposure, I would think, in 2023 than it was in 2015 or even 2018 or maybe even 2021. How much does that influence potential deviation from pricing? Just the fact that it's kind of getting less special.
Ram: (26:51)
We will never, in my opinion, see a premium on GBTC again. It was a short-lived premium and what drove the premium was the fact that GBTC enabled you to access Bitcoin through the convenience of your brokerage account. And as we know, the capital markets are tens and tens of trillions of dollars. You put in a ticker, you hit ‘buy’ and not many retail investors read the prospectus, understand all the dynamics behind it.
Tracy: (27:21)
You know, when you were describing the trust, you were talking about basically liquidity and maturity transformation by non-banks, which to me makes something like the GBTC, the sort of ultimate shadow bank. And I guess my question is, should we have just had an ETF instead? It seems like we ended up with maybe a closed-end structure. Well, I mean I could argue it both ways, I guess. Maybe a closed-end structure is better for an illiquid asset like Bitcoin. But tell me your thoughts.
Ram: (27:52)
So Genesis was the ultimate shadow bank. The issues around Grayscale aren't so much that they took Bitcoin and listed in a token format on the public markets. It's the allegation, or the perception that they're not offering liquidity to their investors through Reg M to enable to access that. You know, the SEC Chair, Gensler, denied the application for gray skill to convert to an ETF in November of ‘21.
Again, around the peak of the Bitcoin market and just before the Fed started to raise rates. This is really a speculative question. Certainly if there was an ETF offered, investors would utilize the ETF. It's got lower fees, it's also convenient. There's not going to be a discount to NAV, but GBTC would still be out there, because it still has that Hotel California dynamic. That issue of Bitcoin being trapped in this trust would still remain.
Joe: (28:50)
But they did apply to turn GBTC into an ETF. And so was the basic bet then that, okay, fees are going to collapse, presumably, in an ETF structure, but the NAV would be so much bigger in an ETF structure that it’s a worthwhile tradeoff?
Ram: (29:07)
Right, it's a rate volume trade-off. There are competitors to GBTC today. GBTC was the first and only game in town for several years and their competitors and other offerings, for example, Valkyrie has published a letter saying, ‘we're happy to be the program sponsor. Hey Grayscale, let us manage that for you,’ which is really, Grayscale committing corporate suicide to have to terminate themselves. So you're right, you would see fee compression and you probably would see volumes grow.
Joe: (29:37)
Well, we're recording this on [Jan.] 17th, so who knows what's going to happen between now and when people hear it, which is a couple days. But what are you watching for here and what should we be watching in this development? Because there are all kinds of moving parts.
Ram: (29:50)
I’m looking for… One, is there an involuntary petition for Chapter 11 that creditors to Genesis get together and say, ‘Hey, we're tired of the fact that there's no resolution’ and forcing Genesis into bankruptcy. If that happens, and there are other things you need to look for. For example, DCG attempted to kind of quasi-bailout Genesis, not through cash, but by creating this $1.1 billion loan, they swapped out this bad loan, Three Arrows Capital, for this good loan backed by DCG.
I would love to see the terms of that promissory note. And if that note, at the risk of getting a little technical here, but if that note is callable in the event that Genesis goes through Chapter 11, which Barry claims it's not callable, but there may be other provisions that would force DCG to pay it, then that note is really like a noose around the neck of DCG. A Genesis Chapter 11 can drag DCG over, so we have to assess that promissory note in what I think is an increasingly inevitable Chapter 11 for Genesis.
Tracy: (30:59)
Where are Genesis claims trading at the moment? Because they are out there, right?
Ram: (31:03)
They're trading, it's been reported on Twitter -- take what you want -- is in the low 20 cents, which by the way, is lower than the claims for Voyager, BlockFi, Celsius, which is an indication that markets do not believe Genesis is solvent. Now Barry through his public letters has said, and insisted multiple times, including over the last eight weeks, that the issues at Genesis are around liquidity and duration mismatch -- not solvency. And he has to keep saying that because the loan agreements states there's a representation from Genesis attesting to their solvency. So if they took in customer funds after Three Arrows Capital, which they did, or after the FTX blow up, which they did, and in fact they were insolvent, they would've violated the law. And that brings you to why you have this SEC and DOJ investigation.
Tracy: (31:57)
Honestly, I feel like in crypto liquidity is almost synonymous with solvency.
Joe: (32:01)
Yes, absolutely.
Tracy: (32:02)
Not in traditional banking for reason that Ram just outlined.
Joe: (32:05)
Totally. And partly it's because they're so internal and so convex, I would say. You've hinted that there's like a Shakespearean element to all this. How should we think about this?
Ram: (32:21)
So this is a big Shakespearean drama with intracompany, intrafamily relationships. Related parties.
Joe: (32:26)
Yeah. That’s all of crypto right?
Tracy: (32:27)
It’s so incestuous.
Ram: (32:28)
Very incestuous. Exactly. So here's my take. Julius Caesar is Barry Silbert. He had the DCG empire. Julius Caesar crossed the Rubicon. That's when Genesis suspended withdrawals. And of course, Grayscale is run by his lieutenant Michael Sonnenshein. That's Mark Anthony, his trusted Lieutenant. Mark and Julius Caesar have a shared love interest. Of course, that's Cleopatra. We'll call that Genesis. We’ve got to anthropomorphize a little. So you can keep going. But yeah, it is a grand drama
Joe: (33:01)
Ram Ahluwalia, thank you so much for coming on Odd Lots. I actually kind of get it now. It's really complicated, but you explained it really well and it really is extraordinary, the degree to which this one vehicle seems to have created so many headaches. So, appreciate you explaining it to us on today's show!
Tracy: (33:18)
Thank you. Thanks so much Ram, that was great. And you even defended the SEC a little bit.
Joe: (33:22)
Don’t worry, we won't highlight that. We won’t tweet out that part.
Joe: (33:25)
Tracy, that really was helpful to me because, first of all, just to back up, there's so many things in crypto that start with ‘G.’ This is why it's confusing.
Tracy: (33:55)
It’s like the three Gs of the crypto apocalypse.
Joe: (33:57)
Gemini, Galaxy -- Galaxy wasn't part of this story.
Tracy: (34:02)
Grayscale, Genesis, Gemini, GBTC, DCG.
Joe: (34:07)
I honestly think this is, they’ve got to come up with some new names or they all have to merge, because I really think this is part of why it's so confusing.
Tracy: (34:13)
Well, I think everything should move away from three or four letter acronyms for start. That would help. But I do think you're right. That was totally a market structure episode, not necessarily a crypto episode, but it does throw up the usual questions, I think, for crypto, which is what does this space actually look like, right? When all these sort of money making ecosystems start to fall apart?
Joe: (34:36)
I hadn't appreciated the degree to which, and I don't want to say their entire existence, but they had a big sort of value prop to the extent that that is a useful term for some of these sort of CeFi neobanks was essentially just having established that relationship in order to pledge Bitcoin for GBTC. And how like, okay, once you have that and as long as there's some sort of premium because there's a scarcity, because it is difficult to get Bitcoin exposure, that's just a money printer. But then once that goes away then all of these business models just like don't really work anymore.
Tracy: (35:12)
Well, absolutely. And Ram's point about the sort of resemblance to the yield curve was fascinating. And when you think about crypto, the way it's recreated certain aspects of the financial system -- I know it's become a bit of a cliche at this point to mention this -- but the idea of, you know, Tether breaking the buck is sort of like a money market fund. And then this is sort of like the yield curve. Those examples come up a lot.
Joe: (35:35)
Well, you know, and we didn't actually talk about this at all, but there was an even more specific sort of curve, which was the other regulated way that entities could get Bitcoin exposure. It was those CME Bitcoin futures, which for a long time traded with a huge premium to spot. And so there was for a while, a theoretically riskless trade that you actually could arb where it's you pledge Bitcoin or, you know, whatever. There were guides on how to do it, but all of these trades were predicated on a sort of scarcity of access to Bitcoin. That's now going away.
Tracy: (36:11)
Absolutely. All right. Shall we leave it there?
Joe: (36:13)
Let's leave it there.
You can follow Ram on Twitter at @ramahluwalia.