1/ What happens to Gemini Earn clients?

I believe there is a credible path to full recovery.

However, Earn clients may face a choice: accept immediate liquidity in the near-term in exchange for a discount, or wait a long-time for full recovery.
2/ Disclosure: This does not represent any legal advice or financial advice. Review your lending agreement. DYOR.

I'm only sharing an opinion. Seek outside counsel.

Also, don't trust random people on the internet.
3/ This analysis assumes Genesis goes thru a Chapter 11 scenario.

There are three factors at play:
- DCG's willingness & ability to raise equity
- Priority of Gemini claims (I don't know)
- The price of GBTC (and by extension - bitcoin)
4/ Here's the good news.

The DCG shareholder letter revealed that Genesis has a $1.1 Bn loan 'Promissory Note' to parent DCG.

And there is no longer any exposure to bad debt from 3AC.

This set of actions restored the solvency of Genesis Lending by moving 3AC asset to DCG
5/ However, Genesis Lending now has a duration issue.

Ideally, Genesis Lending would sell the $1.1 Bn loan on the open market.

But there is no corporate loan market for DCG debt.

And the present value of that loan is far less than the $1.1 Bn face value.
6/ I have not seen the Promissory Note loan terms.

I assume the $1.1 Bn is a balloon payment at the end of 10 years. No P&I payments along the way.

At a 12% discount rate, the Promissory Note is worth $350 MM.

At a 15% discount rate, the note is worth $272 MM today.
7/ Genesis Lending's largest asset is now ~$1.7 Bn across two loans to DCG. So long as DCG is a going concern then DCG can meet its obligations and pay the loan.

DCG should be able to raise money if they are flexible on valuation:

8/ If DCG raises $500 MM+ in equity, it's ability to meet the bond payment obligations goes up substantially.

The risks are i) DCG doesn't raise a material amount, or ii) the price of GBTC or Bitcoin drop substantially, iii) or further loan writedowns.
9/ We showed in this thread that price of bitcoin is directly correlated to the revenue generating power of Grayscale.

We need to see Bitcoin stay above [ $10K ] so Grayscale can generate sufficient fees

10/ Those are the risk factors. Where do we go from here?

Genesis is negotiating with its with its creditors and owner DCG.

Genesis Lending levers are: i) principal forgiveness, ii) a new payment plan, or iii) offer a 'bail-in' (e.g., a conversion of debt to equity).
11/ I assume no bail-in. My base-case is Genesis Lending does Ch 11 (leaving other affiliates such as the OTC desk running as usual).

Genesis Lending would not want a group of retail investors owning a piece of the business. Plus depositors just want their principal back.
12/ Because Genesis Lending is now solvent, there is a path to full recovery.

But depositors may face an ugly choice: i) a 'term out' - getting paid some now and the rest over years, or ii) accepting a reduction in principal now for "immediate" liquidity (measured in months).
13/ Key Points:

We don't know the level of high quality liquid Genesis assets (stables, ETH, etc.)

We also don't know the whether Gemini Earn clients are secured (e.g, do they have a priority claim?).

Circle Yield loans were secured.

14/ However, Gemini Earn T&Cs state: "Loans made through our Program may not be secured. As a Lender, you understand that you have exposure to Borrower credit risk.".

Also Gemini states they are not responsible for loan performance or any representations of Genesis.
15/ How does the priority of claims work?

Secured creditors either get their collateral or the value of the collateral in cash. If the collateral is worth less than claim, then the claim is split into a secured claim covered by collateral and an unsecured claim for the remaining
16/The secured claim is paid in full while the unsecured claim receives a pro rata share of any payments to unsecured creditors.

If DCG raises equity and continues to execute, then even unsecured claims have a path to recovery.
17/ After a bankruptcy filing, you should expect to see a market form to purchase these claims.

Hedge funds model out expected recoveries and timeframes. They will offer a bid for your claim at a discount to their estimate of intrinsic value. They will offer you liquidity.
18/ In the case of MF Global, customers received between 50 to 93% as additional assets were recovered.

But again, the recovery turns on the quality and liquidity of the Genesis Lending assets solely, and the priority of the claims.
19/ The homerun recovery scenario?

DCG raises fresh equity capital. DCG injects equity into Genesis Lending. They keep Genesis Lending as a going concern. Customers withdraw funds.

(Or the Fed pivots and bitcoin moons...)
20/ One other key variable in all of this?
Regulators. The NYDFS, CFPB, FTC, and SEC all could take actions here. Both Gemini & DCG have extraordinary pressure to make retail clients whole.

The Gemini T&Cs do have a 'class action waiver'. But they should have representation...
21/ Regulators could argue that retail investors did not have sufficient disclosure (e.g., they were not fully informed of the risk factors as in a classic PPM, no balsht, etc).

If there are non-accredited investors, the pressure to make investors whole goes up substantially.
22/ Before we wrap-up, I want to be clear I have not seen any evidence that Gemini or Genesis Lending or DCG engaged in any deceptive practices or fraud.

The other business units are working just fine. These are lawful regulated actors acting in their commercial interests.
23/ We should hope for a speedy capital raise for DCG.

DCG can play a critical role as a loss-absorbing buffer to blunt the chain of contagion.
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