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The Year of Finding Out
2022 has become the year of chaos. The previous year’s opulence and impulsivity led to a year where tens of thousands of people sacrificed their jobs at the altar of profitability. 2021 felt like a fever dream of corporate excess, where those who worked the least seemed to be rewarded with the most, and when regular people attempted to take advantage of this new-found societal joy, they were deemed disloyal. We were told repeatedly that the future seemed bright - that numbers were always going to go up - and when we remarked how ridiculous it was that people were buying digital real estate and six-figure monkey pictures, we were told to stop being skeptics.
If 2021 was the year of fucking around, 2022 has been the year of finding out - a repeated myth-busting expedition where perfect, untouchable companies died a million little deaths. U.S. venture capital raises fell 30% in Q3, a nine-quarter low following an industry-wide realization that funding businesses that either aren’t profitable or don’t make money at all doesn't lead to great long-term outcomes. And yet - despite a 50% drop in the last quarter - VCs are still pumping billions into Web3 companies, though one of the largest deals was a $300 million Series B into a company led by FTX Ventures, who you may remember are several hundred frauds in a trench coat.
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Those of us who have been questioning reality in the last year - pointing at things that seem stupid and saying “hey, isn’t that really dumb?” have had the grim edification of watching bad ideas that suck get punished. Elon Musk has had the chance to show us what decades of business acumen have meant for Twitter - by which I mean a continually chaotic stage play where a 56-year-old billionaire is humiliated thousands of times a day as he runs a company into the ground. Musk restored twice-impeached retiree Donald Trump over the weekend based on a poll of users, only for Trump to keep his promise that he wouldn’t be returning to the platform, leading to several embarrassing posts where Musk attempted to act as if Trump was desperate to placate a Twitter addiction he’d long since shed.
Musk’s tenure at the company has been ugly - he’s refusing to pay vendors and ending perks at Twitter to handle a “challenging” financial situation that he created by taking on $13 billion of debt to buy a website that hates him. Ending perks is deeply unpopular in a public company, but can be explained as placating shareholders - in Twitter’s case, every worker realizes that the person they are helping is Elon Musk. In many ways, we see that billionaires are just like regular people - capriciously making big, stupid changes in their lives while ignoring the things they could do to fix things, such as trying not to lose the remaining two-thirds of your top advertisers. He has continued to abuse his workers with the “hardcore” culture that led to hundreds of people quitting, keeping people until 1:30 am on a Saturday to do “code review.”
And he has just become deeply, deeply unpopular. The regular people I talk to - those who are not continually shoving their head in the online septic tank - generally view Twitter as a dying business run by a giant child. The exterior view of Musk has changed from "guy with electric cars and rockets” to “Rich Guy Having Mental Health Crisis,” something more approaching a contestant on a terrible reality show than a cool business guy that they want to see win.
While perhaps I’m blowing it out of proportion, Trump refusing to tweet after being unbanned has to be one of the most embarrassing moments in Elon Musk’s life. Trump has always had a knack for getting under other wretched weirdos’ skins, and there was very little value in him returning to Twitter now that he’s not president. While Truth Social is a terrible place, it is exactly what Trump wanted from Twitter - a place he can post anything and receive thousands of posts of “wonderfully said, sir!” from people in their 70s with names like PatriotLord who use incredible amounts of camera filters. Twitter was never about spreading a message for our 45th president - it was always about adulation, and he has now found that elsewhere.
That, and he has been one of Musk’s few real detractors, framing him as a desperate and greedy man enriched by government subsidies, one that would have “dropped to his knees and begged” Trump for help.
Musk exists in a painful vacuum where he can’t seem to do what he really wants to do. His ideas to “fix” Twitter’s verification system have failed, and he has ostracized large chunks of the advertisers that actually make the site money. The media has been ruthless in eviscerating his dealmaking and business practices. Despite claiming to rebuff his interest in the Twitter deal, Musk may have taken Sam Bankman-Fried’s money. And despite his outright disgust toward journalists, I believe that Musk is deeply hurt by the floods of negative press he’s earned, yearning for the days when every little outburst was met with positive articles from CNBC and Inc Magazine. For the best part of a decade the media - with some exceptions - failed to actively interrogate his myth, and as it crumbles down, every publication is intent on making sure they’re on the right side of history.
It’s all part of 2022’s myth-busting mise en scène. We have been told for years that billionaires earned their place at the table, and that these unbreakable titans of industries could do no wrong. Except we’ve now seen exactly what happens when very rich men are given absolute power and unlimited funds - companies begin to die.
And on the periphery of these billionaire bumbles, the cryptocurrency industry sits on a precipice.
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Yes, It Can Get Worse
The consequences of the FTX fallout have left dramatic ripples throughout the cryptocurrency industry, with one specific ripple threatening to become a full-blown tsunami - Digital Currency Group. To quote the great Michael Burgersburg:
The Digital Currency Group (DCG) has long been a darling of the crypto industry. Led by early Bitcoin adopter Barry Silbert, DCG acts as the parent company for a group of crypto-related firms that touch on every aspect of the “crypto-conomy.” One of the major components of this business is Genesis Trading, a “global leader in institutional digital asset trading, derivatives, lending and custody services.” One component of Genesis Trading is Genesis Global Capital, a crypto lending firm that managed funds for other institutional partners. One of the largest of these customers was the Gemini exchange, which operated its own “yield” program targeted at retail investors.
Last week, Genesis Global Capital went from saying that they had no material exposure to FTX, to saying they had $7m in exposure, to saying that they had $175 million in exposure, to saying that they needed to freeze customer withdrawals and new loans entirely and also they may be going bankrupt. Gemini Earn, the yield-generating product of the massive cryptocurrency exchange Gemini, kept user assets in Genesis to generate said yield. Bloomberg is reporting that $700 million of customer funds are tied up in Genesis:
Whether Gemini Earn customers, who collectively are significant lenders to Genesis, ever get their money back remains to be seen. And much depends on Genesis itself, which has hired advisers to explore all possible options, including raising new funding. Genesis, one of oldest and most well-known crypto brokers, has long been a big player in crypto lending. The firm had $2.8 billion in total active loans in the third quarter, according to its earnings report.
The fact that Gemini may have been burned by Genesis should tell you a great deal about how bad this situation is. Gemini has remained one of the more trustworthy custodians of the cryptocurrency industry, and yet now may have misplaced $700 million of customer funds. The identical river giant Winklevosses have little to show customers other than a promise to work with Genesis to get their money back.
The central point of this chaos is cryptocurrency entrepreneur Barry Silbert, who founded the Digital Currency Group. Per Dirty Bubble Media:
DCG was founded and is led by Barry Silbert, an early adopter of Bitcoin and the founder of a company called Restricted Stock Partners, later called Second Market. In a bit of foreshadowing, Mr. Silbert built his first business trading in illiquid stock from distressed and bankrupt companies. In 2013, Silbert decided to pivot to investing and trading in Bitcoin. He created the created the “Bitcoin Investment Trust (BIT),” a vehicle to facilitate accredited investors’ speculation on Bitcoin. Rebranding his firm as Digital Currency Group, Silbert later spun off the non-crypto portion of the business and sold it to Nasdaq in 2015.
Barry Silbert’s empire is based around his… diversified… collection of cryptocurrency-related companies:
Greyscale, the crown jewel of his holdings, operates a number of publicly-traded trusts that hold cryptocurrency assets like Bitcoin, Ether, and other coins.
Genesis operates (operated?) both as an over-the-counter cryptocurrency exchange as well as offering staking and lending services.
Foundry provides services to cryptocurrency mining firms, particularly Bitcoin
Coindesk, one of the leading media outlets focusing on cryptocurrency
Luno, a “leading” cryptocurrency exchange based in Singapore
Venture investments in dozens of other firms.
The chaos scenario began with the collapse of 3 Arrows Capital, who you may remember borrowed $2.3 billion from Genesis, who are still owed around $1.2 billion that they will never, ever see. According to Burgersburg, DCG filled the hole in the balance sheet by moving that loss from Genesis to their own balance sheets, and then plugging it with a $1.1 billion IOU (a promissory note due in 2032) to Genesis. More confusingly, they also appear to have borrowed $575 million from Genesis at some point, which they allegedly used to invest and buy back DCG’s stock. And, somehow, they also offered a $140m “equity infusion” to help with the losses from the FTX contagion. Genesis has also been seeking a $1 billion lifeline to keep business going, otherwise facing bankruptcy.
If you’re confused, that’s because all of this is extremely confusing. While Digital Currency Group apparently makes $800 million in revenue a year, as Burgersburg has remarked, how much of that is net income? Most of that revenue is generated by DCG’s Greyscale Bitcoin and Ethereum Trusts, and one has to wonder what financial state Genesis is in considering their inability to hand back the $700 million they’re storing for Gemini customers.
Grayscale has also refused to share proof of reserves due to “security concerns, and now their stock GBTC - which is meant to be a stock that represents the price of Bitcoin - is trading at a massive 45% discount. While the assets are stored in Coinbase Custody, one has to wonder why the street is quite so scared of Silbert’s empire of dirt. Furthermore, Grayscale appears to be the only part of said empire that makes any money.
If Genesis is insolvent, and Gemini fails to return the $700 million to customers, this will be one of the largest losses that U.S. cryptocurrency holders will ever have been exposed to. And we don’t know at this time who else borrowed or loaned money to Genesis, other than the company that owns them. It could be exchanges, or major cryptocurrency projects, or just some extremely rich and foolish people that are now cursing their obsession with Schrute Bucks.
We are in the post-fantasy era of technology, where tolerance has dropped for those that have manifested riches and empires based on complete fantasy. Whatever the result, reality has begun to set in on those who assumed their luck would never run out. They fucked around, and they’re about to find out.
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