Weekly Update 11.27.22
Genesis/DCG has a situation; BTC in no-man's land; ETH holding up but not convinced
I hope everyone had a good Thanksgiving and a restful weekend. This week, the stock market was closed on Thursday and had an early closure day on Friday. This gave the crypto market an excellent opportunity to show if there was true idiosyncratic strength or if the recent bullish moves were simply the equities market dragging us along for the ride. Since the market failed to make further upward progress from where it left off on Wednesday, it appears that crypto-specific buyers have yet to step up and are still waiting on the sidelines.
This makes sense from both a news and chart perspective. On the news front, people are waiting to see how the Genesis/DCG situation resolves. The rumor is that we will get clarity this coming week.
DCG/Genesis
The quick summary is that during the 3AC debacle, 3AC levered long GBTC, betting that the discount would close. The discount did not close and instead widened, blowing them up. Genesis had lent 3AC $2.36B with an 80% margin requirement and took a $462M hit when they blew up. DCG, Genesis’ parent company and owner of Greyscale, the company that runs GBTC, came to the rescue. Around the same time, before and after the market topped, DCG had the same idea as 3AC (now known as the widowmaker trade) and was also buying up GBTC, betting that the discount would close. Instead, the discount widened, and the price of Bitcoin fell, causing more damage to DCG. They also plowed revenue into buying more GBTC. Effectively, they were confident the discount would close, but fewer people wanted to buy as their position worsened because they knew DCG was the largest holder of GBTC and would likely need to sell. Therefore it did not make sense to step in front of that large train. Now, Genesis and DCG are in trouble because of 3AC, FTX, the GBTC discount widening, and the price of BTC falling. Both now have more debts than assets. Some of DCG’s debts are to Genesis, its subsidiary. Ryan Selkis wrote a good summary of the potential paths.
If Genesis goes bankrupt without limiting the liability to DCG, DCG will likely go under as well. To survive, DCG must convince Genesis’ other creditors to share the pain and take a haircut on their claims at Genesis. If successful, DCG will likely be able to raise money to fill its balance sheet hole because it has a golden goose in Greyscale. Greyscale operates GBTC and ETHE funds, earning hundreds of millions of dollars annually in fees from investors who cannot withdraw their funds. If they fail, DCG goes down with Genesis, and everyone spends years in bankruptcy proceedings.
I have yet to see any likely scenarios where DCG ends up selling off Bitcoin or Ether from GBTC or ETHE, which is good. Thus, the contagion impact of a worst-case scenario would be that people, projects, and institutions with assets at Genesis would be negatively impacted. The write-downs they’d need to take could then potentially force them to liquidate other assets. If the forced selling of other assets makes other companies implode, the contagion could keep spreading. If the forced selling is not significant enough to cause other failures, it would be reasonable to expect the crypto-specific bottom is in (macro is always in play). As I said at the beginning, given the lack of clarity around the second-order impacts of the Genesis/DCG situation, it makes sense that crypto-specific buyers are not ready to step in.
Bitcoin
From a chart perspective, Bitcoin is also hanging in-between two clear levels:
$19K, which coincided with the December 2017 top and was the previous, long-tested support
$14K, which marked the top of the June 2019 bear market rally. Below that, $12.3K served as significant resistance in 2018, 2019, and 2020.
Thus, the current price of $16K is no man’s land. Either we reclaim 19K, proving this was a failed deviation below the 19K support and build productively upward, or we finish this move closer to $14K.
A lot of people, many of whom I respect, are making the case that now is the time to buy. Pretty much everything that could fail has failed, and we’ve held up surprisingly well to FTX collapsing. Ether, in particular, did not even make new lows below the 3AC price levels after FTX failed. I agree that we are closer to the bottom than the top, but patience has paid off thus far in the market, and I will continue to wait for better price levels and clear signs of strength to rejoin the fray. It also gives me pause that certain mostly dead altcoins have had seemingly isolated 30-40% rallies these past few weeks, which signals that people are playing pump-and-dump games and manipulating the thin liquidity. This is not generally a sign of a recovering market.
Ether
On Monday, on the 12H chart, we got a lower low. The wick did not go as low as the prior wick, but the candle body closed lower than the previous low close on Nov 9th.
Last week’s rally may also be running out of steam (RSI curling down, volume petering out). Which, if that is the case, would be a lower high. This makes me think that we are in for the same bouncy ball losing momentum play that Bitcoin faced at 19K.
Also, if the monthly candle closes at these levels for BTC and ETH, it does not look particularly bullish. The S&P is pretty much at the previously defined resistance, so it wouldn’t be surprising to see a pull-back there. Also, protests in China are ramping up, so who knows where that will lead.
So my take is that I will continue to sit on my hands. I hope bulls show up and prove that they’re back in control, but I have yet to see sufficient evidence of that, nor are prices so low that I’m willing to step in (for instance, if we somehow ended up at $500 ETH, I’m probably buying that regardless of what the market looks like). That’s all I got this week! I hope that helps, and good luck out there.