Nick Chong · 4 hours ago · 3 min read
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Genesis Capital CEO: institutional lending, crypto credit bubbles, and why nobody’s shorting Bitcoin [INTERVIEW]
Genesis Capital, the lending arm of institutional OTC cryptocurrency firm Genesis Trading, just might be the biggest champion of the 2018 bear market, having built a multi-billion-dollar business off the back of Bitcoin’s 70 percent decline.
CryptoSlate sat down with the CEO of Genesis Capital and Genesis Trading, Michael Moro, to learn more about why and how the largest stakeholders in crypto are buying and borrowing in a rapidly institutionalizing market.
18 months, $3+ billion in loans
A lending business was a calculated move for Digital Currency Group-owned Genesis Trading, who in 2013 set up shop in New York as one of the industry’s first over-the-counter (OTC) market makers dealing in large-ticket trades for high net worth individuals and institutions.
But it wasn’t until 2018, according to Moro, that the crypto market saw the entrance of “sophisticated” participants wanting to actively trade, and that meant wanting to borrow to take positions on both sides of the market.
“Because of 2017 and the crazy price run, we had a lot more sophisticated investors. The traditional buy and hold guys, they were always there. What we didn’t have was the more sophisticated institutional hedge funds that first got their feet wet in 2017, and could take advantage of a lending market in 2018.”
The timing of Genesis Capital’s March 2018 launch then—as Bitcoin set in for what would be a steep yearlong downtrend—catapulted the business to success, according to Moro, who added “there’s no question” that his firm’s boom in trade was driven by institutions borrowing to go short and capitalize on Bitcoin’s descent.
18 months on, the business would be the largest known lender in crypto—having originated more than $3 billion in crypto and cash loans, said Moro, with an additional half-billion dollars worth currently outstanding.
Who’s borrowing from Genesis Capital, and why?
Hedge funds shorting Bitcoin may have built a platform for Moro’s lending business, but the game has matured as the market has developed.
Now, there are market-neutral funds borrowing to balance their exposure between long and short positions. But apparently, shorting the spot price of BTC is no longer part of this strategy. Moro explained:
“The guys that were shorting Bitcoin in 2018—no one’s shorting Bitcoin today. Bitcoin’s almost become the base pair, and it does what it does. People aren’t shorting the spot. However, what people will do, is short the alts.”
This is unmistakably the case in the interbank Foreign Exchange market, where the US Dollar is used as a base currency and any meaningful action on the short side goes on in the fiat ‘alts,’ the Euro, the British Pound, and so forth. It seems Bitcoin has gone the same way.
Remarkably, Moro suggested altcoins are being put in their “pecking order” by institutional traders like his clients, who will short them back to their perceived fair value. They will not, however, sell Bitcoin to take their short positions (opting to use stablecoins instead.)
“Relative to how Bitcoin performs, they’ll short Litecoin, or XRP, or Ethereum. If Bitcoin went up 5 percent in a day, and say Litecoin goes up 10 percent, they’ll short Litecoin back down. They’re almost putting things back into the relative valuation that these investors have made up in their mind, as in ‘here’s how the pecking order goes.’”
The growth of Bitcoin’s futures market has added another dynamic to the lending scene.
“Arbitrage guys,” said Moro, will borrow to capitalize on spot-futures spreads, as well as the classic spot-spot arbitrage between exchanges. In a bull market where futures contracts tend to trade at a “pretty good premium” to spot, Genesis Capital tends to lend dollars heavily as clients look to go short on the futures market.
Crypto loans for working capital
Perhaps the most radical clients of Genesis are businesses whose working capital is denominated in Bitcoin, who make up around 20percent of the firm’s loan volume borrowing to finance business expenses and expansion.
Instead of going to a standard small-medium enterprise lender, and then converting the cash to BTC, Moro explained it’s more “straightforward” when they take out a loan in BTC with Genesis.
Avoiding a crypto “credit bubble”
Fledgling startups and funds may have to look elsewhere for a loan, however. When it comes to choosing who to lend to, the firm is highly selective.
Genesis lends to 70 unnamed institutional counterparties whose credit is “really, really strong,” according to Moro, as loose lending policy could apparently have market-wide consequences.
Moro warned that not everyone will be as strict as his firm as the lending market expands, and riskier loans will be made at higher interest rates to less creditworthy borrowers—just as banks lend to prime customers, subprime, and so on. He stated:
“My one big fear is some big credit crisis that happens in crypto. A credit bubble and the bubble popping has happened in every credit market in the history of the world. And so it’ll probably be something to the effect of, either you made a bunch of unsecured loans, everyone defaults at the same time and the lender’s done, and they have no more Bitcoins to return to the people they borrowed it from, so those people are just out their Bitcoin—that’s a scary scenario.”
Moro imagined a second, equally catastrophic scenario, where a steep drop in the spot price of a cryptocurrency, thinkably Bitcoin, would trigger a mass sell-off as lending firms liquidated all the loan collateral on their books.
“No one’s posting more margin, and now you have to liquidate their collateral—that liquidation is going to hit the exchanges. And the margin calls are happening because prices are falling. So now you’re sending an additional 50 or 100 million-dollar market sell order on the exchanges at the same time that the prices are falling.”
Moro seemed more utopian about the near future for the crypto market, saying as a “sign for the future of the ecosystem,” “we couldn’t ask for more” than Bakkt’s soon-to-launch futures contract.
Bakkt: the best hedge yet?
Indeed, the Bakkt futures product has been widely lauded as a game-changer for institutional participation in crypto, but many of the more nuanced benefits offered by a physically-settled BTC contract remain little-discussed.
For one, Moro explained the existing cash-settled CME Group futures contract isn’t a “good hedge” in the eyes of the U.S. Securities and Exchange Commission (SEC), who prefer bona fide Bitcoin to be bought and sold as a hedging mechanism. Bakkt, with its physically-settled contracts, apparently will tick this box.
The practice of hedging against orders is standard practice amongst market makers like Genesis Trading (the OTC arm of Moro’s firm), allowing them to buy and sell to clients and not be affected by price fluctuations. According to Moro, this should make Bakkt a boon for liquidity in the crypto market as it encourages more regulated broker-dealers to follow in Genesis’ footsteps and market-make.
Genesis: eyeing a custody solution
For Genesis Capital to scale its efforts in the lending space, Moro said developing an in-house custody solution is much-needed.
“Clients tell us all the time, can I send you some money. We’ve always been transactional, post-trade settle, so we’ve never held a balance for people. But, now that we have the lending business, custody starts to make a ton more sense,”
In its current capacity Genesis Capital acts as a regulated broker, matching lenders and borrowers, and by policy won’t hold client funds. As such every time a loan request comes through, the firm has to phone up known holders of the crypto in question, receive funds from both counterparties, and make the trade happen.
Custody, it seems, is the firm’s biggest bottleneck.
Genesis wouldn’t necessarily be building a solution from scratch and rubbing shoulders with the likes of custody giants BitGo, Fidelity, or Coinbase Custody, however, and is open to partnering with an existing provider.