Already beaten up market might face another spike in selling pressure fueled by liquidity crisis
The cryptocurrency market has been going through a tough year, but the things we might face in upcoming months or even weeks could bring even more pain to a market that is barely functioning without fresh inflows.
Digital Currency Group crisis
The majority of market participants most likely heard about the problems DCG faced after the implosion of FTX and numerous other firms. The liquidity crisis led to the insolvency of one of its subsidiaries, Genesis.
Investors should pay attention to the ongoing financial distress related to Digital Currency Group (DCG) as the outcome could severely impact crypto markets.
— Arcane Research (@ArcaneResearch) January 4, 2023
After Genesis’ problems became public, analysts raised an important question: what is going to happen with other subsidiaries of DCG, including Grayscale, which holds enormous amounts of Bitcoin that would be liquidated if the company were as illiquid as Genesis?
Digital Currency Group’s bankruptcy would be a catastrophe for markets, as liquidation of their assets would lead to selling off sizable positions in GBTC and other Grayscale trusts. Sentiment among investors has deteriorated after Cameron Winklevoss released an open letter to Barry Silbert, stating that Genesis owes Gemini $900 million.
The letter did not reveal any Gemini plans to go after Silbert if he decides to ignore the highlighted matter. The best outcome of the whole situation would be a coordinated solution between both entities, which may include an involuntary petition for DCG filing for Chapter 11.
Companies tied to DCG were not doing well throughout 2022 considering the massive outflow of institutional funds from the industry. The lack of liquidity could become the reason behind yet another crash of the market, but the next time we will be at risk of reaching values most retail investors will not be ready to cope with.
At press time, the cryptocurrency market’s capitalization is sitting at $800 billion, and Bitcoin is trading at around $16,803.