So is it over for cryptocurrencies?

I remember it as if it were today: a few days after the burst of the so-called “dotcom bubble” people who until the day before carried us (they carried us from the first wave of Italian startups) in the palm of their hands, suddenly avoided us. A rather prominent person in the Turin that counts(goes), always lavish with compliments, one morning following the collapse of the Nasdaq, seeing me from afar, changed the sidewalk in an attempt to pretend not to see me and therefore not have to say hello, I suppose to embarrassment, as if I had popped the bubble (LOL).

From night to morning we had become plague victims

It was fun to witness all this: it proved that people who are not experts in a particular sector – and one cannot objectively be experts in everything – tend to brush everything together when more or less catastrophic news relating to a world appears. specific.

Something like this is happening now too: software developers who until a few months ago would have paid to work in a crypto company today sometimes even avoid having interviews, many friends call me scared to make sure “everything is fine”, others to know if the crypto sector is dead and their bitcoins should be thrown away.

I would like to reassure everyone: everything is fine

Those who, like us, chose a model based on transparency in unsuspecting times, see numerous opportunities in moments like this. But we know well that it is not always Sunday and that when it pours even those who are well equipped with umbrellas and raincoats can get wet.

The situation, on the other hand, is decidedly worse for those who thought that the sun would shine forever, that is, a large part of the CeFi companies, the (by definition) centralized companies that in some way use cryptocurrencies, decentralized by nature, to replicate, often in an opaque if not murky way, certain models of classical finance.

As we all know, it happened first with Celsius, then with BlockFi, then with 3AC, FTX and Alameda and several others. While I was writing the previous post, I received insistent rumors of growing difficulties for important centralized entities, such as Genesis Trading. I decided not to talk about it because news is one thing and uncontrollable gossip is another.

Unfortunately, some of this gossip is turning into news as I write, and the news could get worse.

Digital Currency Group (henceforth DCG) owns Genesis Trading and Grayscale, two crypto giants. DCG owes 1.1 billion dollars to its subsidiary Genesis Trading (but some say half a billion and it’s not clear who is right) which, without that money, goes bankrupt. Why? Simple: it is one of the most important centralized crypto entities in the world and therefore exposed, for better or worse, to all the waves of the sector. In this case, for the worse: its balance sheet has collected giant holes due to the collapses of the past weeks and months. And here we need to understand one thing well: all these centralized subjects have created over time a kind of informal club, lending “money” to each other and therefore remaining tangled up in a thousand operations (often with high leverage) linked to each other: it is obvious that if one fails , a little mud ends up on others and when the mud becomes a lot it causes pain for everyone, in a cascade. Which is what’s happening now.

So Genesis Trading, which in the meantime has blocked withdrawals for days, needs that billion point one (or half a billion), otherwise it goes bankrupt and takes the whole market with it. But DCG apparently doesn’t have them. They asked, as everyone always does, for help from Binance, which said no thanks.

In parallel, DCG, as mentioned, also owns Grayscale which operates with two crypto Trusts – one in bitcoin and the other in Ethereum – something very close to an ETF: bank customers who do not want to directly own cryptocurrencies can purchase shares of these products and therefore have indirect exposure to bitcoin and Ethereum. The problem is that the shares of these two Trusts are now worth around 45% less than the amount of their assets, a sign that the market must have understood how things are in those parts.

Therefore, if DCG does not find the money for Genesis Trading, the latter could collapse. To avoid the crash, DCG could have Grayscale sell part of the 10 billion dollars of bitcoin and 3 billion of Ethereum, i.e. the assets of its two Trusts, which however would put the latter in a rather shocking situation towards its customers. Moral: let’s prepare ourselves for another undesirable but possible debacle which, if it were to occur, would create quite a few problems for various other entities linked at least at an operational level to the companies of the DCG group.

As I write it is not at all clear what will really happen. The obvious hope is that DCG will find a way to keep his castle from collapsing. But there are many tweets in the adverse direction and they don’t leave you very calm, let’s say. And all this does and will further decrease the value of bitcoin and its sisters. It could be an epochal splash.

So why should I be optimistic?

On Monday, in a beautiful room of the Chamber of Deputies, I took part in the conference promoted by the Cryptovalues ​​association on the topic: “What rules and conditions for the development of crypto-activities in Italy?”, in the presence of a good part of the representatives of the Italian sector, of personalities from the Bank of Italy, Consob, OAM and top managers of important banks. Among the interesting things that emerged, I highlight three: the need for transparency and regulation, the hope that the industry will soon find reasons to use cryptocurrencies that go beyond the speculative models underlying the collapses of 2022 and the conviction of some of those present on the fact that banking entities will be the ones to “save” cryptocurrencies, or to give them a new impetus, the reason being that no one knows how to do the job of validation and risk calculation better than banks.

Therefore, if we add these three elements and press the FF (fast forward) button, we could actually find ourselves within a few years in a regulated situation in which investors are more protected than today on the risks related to their adoption of digital assets and where the The main crypto players will be the banks, which will move from the phase in which they avoided or fought digital assets to the one in which they will be able to offer them to their customers together with a series of related services, primarily custody ones.

It could very well be. On the opposite side of this vision, opposite but not antithetical, there will be a significant strengthening of transparent, therefore decentralized, therefore on-chain activities: even if from the outside it may seem the opposite, crypto and DeFi are stronger than ever in their essence of independent and censorship-resistant entities.

It is therefore a good thing that opaque, superficial and greedy subjects are swept away: they reap what they have sown. Sorry for anyone who got caught up in it but, as always in these cases, better late than never.

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