Why did Bitcoin's largest "deleveraging" in history lead to institutional service providers suspending their lending business?

The cryptocurrency over-the-counter trading and lending company Genesis Global Trading, which specializes in serving institutions, has paused its expansion plans for its lending business after observing the largest "deleveraging" of assets in the market's history. What could be the reason behind this decision?

Genesis is a wholly-owned subsidiary of Digital Currency Group (DCG), which is the parent company of Grayscale Investments, the largest asset management firm in the digital currency industry, and also the parent company of the well-known cryptocurrency media outlet CoinDesk. Genesis had just announced in January of this year that it had set a new record for quarterly loan volume in the fourth quarter of 2019: $1.1 billion. However, they have now decided to pause this business.

Market Reversal in March

Genesis CEO Michael Moro recently explained the reason for the company's suspension of its lending business. At the beginning of this year, the trading price of Bitcoin futures contracts was slightly higher than the spot market, so Genesis' clients would typically borrow US dollars from them to buy cryptocurrencies on the spot market and then sell them on the futures market to profit from the spread. However, since the drastic price fluctuations last month, the market arbitrage opportunities have disappeared, leading to unprecedented instability in the cryptocurrency lending market. Michael Moro stated:

"After March 12th and 13th, the market experienced a reversal."

As Bitcoin prices sharply declined at that time, clients began to repay the borrowed US dollars and withdraw the pledged Bitcoins, coupled with significant negative spreads between the futures market and the spot market. Traders then adopted a new strategy:

"Shorting the spot market, buying futures contracts, and waiting to profit from the price difference at expiration."

Michael Moro claimed that this was the largest deleveraging Genesis had seen in the past few years, with repayment and Bitcoin withdrawal volumes at their highest levels ever. In this scenario, Genesis immediately suspended its lending services in March. Genesis stated:

"Stock markets are collapsing, oil markets are collapsing, fixed-income markets are fluctuating, you'll find that commercial paper isn't rolling because the credit markets are in disarray. In that environment, how can I safely provide lending services?"

Prudent Risk Assessment

After much consideration, Genesis decided to temporarily suspend its lending business, waiting for the dust to settle before reassessing if the market conditions are suitable. While Genesis chose a conservative approach, its competitors continued to issue loans with significantly low collateral ratios. In response, Michael Moro stated that he would rather see Genesis miss out on short-term profit opportunities than expose themselves to default risks:

"Typically, we would choose to compete with our peers and see if we can ultimately achieve our goals, but about two weeks later, we let others take the risk because it would be challenging for me to feel comfortable in such risk."

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