Before the cryptocurrency markets crashed last year, Sam Bankman-Fried’s hedge fund made a $1 billion bet on Genesis Digital Assets, a Cyprus-registered bitcoin miner that was rigged to consume the electricity of a small town in Kazakhstan.
The cash injection from Mr. Bankman-Fried’s Alameda Research LLC was large even for the hot cryptocurrency world, dwarfing the FTX founder’s other investments in private companies.
Genesis Digital is now one of the biggest assets in the FTX bankruptcy, the product of a worldwide spending spree in which Mr. Bankman-Fried’s companies poured money into crypto tokens, arena branding deals and Bahamas real estate.
Extracting value from Genesis Digital can be difficult. The price of the Bitcoin mining company has fallen sharply. According to Cypriot corporate filings and people familiar with Genesis Digital, only half of Alameda’s funds in Genesis Digital were used for the company’s operations. For more than $500 million, it bought existing shares from two Genesis Digital co-founders, a detail that was not previously reported.
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A Genesis Digital spokeswoman said the company received money from Alameda “at market value” during routine fundraising, and that its founders own a majority of the company.
SkyBridge Capital, which invested more than $60 million in Anthony Scaramucci’s Genesis Digital, slashed the value of its stake in the bitcoin miner by 59% between June and September, according to SkyBridge securities filings.
A SkyBridge spokeswoman declined to comment.
The FTX collapsed in November, and Mr. Bankman-Fried pleaded not guilty to the charges in federal court earlier this month. Prosecutors allege he defrauded investors and billions of dollars of FTX clients have moved their cash into hedge funds. The new management of FTX lists exactly where all the money goes.
The bulk of what’s left for FTX and Alameda lenders to choose from is a slew of investments in startups like Genesis Digital. FTX, Alameda and other entities controlled by Mr. Bankman-Fried have invested more than $5 billion in more than 150 startups, as well as venture firms such as Sequoia Capital, according to Alameda company filings reviewed by The Wall Street Journal.
Many of these investments are concentrated in the crypto sector, adding to the difficulty of recovering money in the event of a bankruptcy.
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John J. Ray III, FTX’s new CEO, told the US House of Representatives: “This is a very difficult time for the crypto sector, and what concerns me is the impairment of the $5 billion portfolio, because obviously this is a recovery pool for our clients.” committee last month. “Many of these investments are likely to be problematic.”
Thomas Braziel, an investor who takes claims from creditors in bankruptcy, said he expects creditors to get 20% to 60% of their money back. Given that the firm’s portfolio is heavily invested in cryptocurrency, he said it won’t contribute much to the total.
One of the world’s largest bitcoin miners, Genesis Digital is connected to the cryptocurrency market.
Bitcoin mining works like this: Miners process transactions on the network – solving complex equations in a process that rewards them with newly created bitcoins. In the early days of cryptocurrency, most of the crunching of digital numbers was done on home computers, before an industry of massive, power-guzzling data centers wanted to process bitcoin transactions at scale.
When bitcoin prices rose in 2021, the valuations of major miners rose to billions of dollars. Given that the end product of these companies is bitcoin, their stock prices tend to go up when prices go up and down when they go down. With Bitcoin down more than 70% from its peak, shares of many publicly traded miners have fallen between 70% and 99% in the past year; the biggest one, Core Scientific Inc. filed for bankruptcy protection last month.
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Adding to the challenges is the steep rise in the cost of electricity, a major cost for bitcoin miners.
Genesis Digital started in 2017 when a duo of German bitcoin miners teamed up with a trio of Kazakh entrepreneurs. Their plan was to use this to create bitcoin-mining data centers in Kazakhstan it’s relatively cheap, coal-fired electricity, company executives said in video interviews posted online.
German co-founders Marco Streng and Marco Krohn came with several years of bitcoin-mining experience, while the Kazakh businessmen had local connections and a background in commodities.
“We brought our experience and they brought technical know-how,” said Abdumalik Mirahmedov, one of the Kazakh co-founders and its former chairman, in a 2021 Genesis Digital video, referring to the German co-founders.
Mr. Mirahmadov said in the video that he was interested in business from an early age, and at the age of 14 he was selling ice cream machines. After college, he entered the commodities market and owned a joint venture with commodities giant Trafigura Group.
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Another co-founder, Rashit Makhat, served on the boards of companies partly owned by the Kazakh government, including Kcell, a major telecommunications company, according to the companies.
With access to cheap energy in Kazakhstan, Genesis Digital marketed itself as a low-cost bitcoin provider – it was able to grow by building and operating its own data centers.
In mid-2021, Mr. Bankman-Fried directed more than $100 million to the company from Alameda, a cryptocurrency hedge fund in which he owns a 90% stake, according to company filings. Mr. Bankman-Fried joined the board of Genesis Digital in October 2021.
In December 2021, Mr. Bankman-Fried met the president of the Central Asian country with a group of other foreign investors. Around a round table in the presidential palace—an ornate building resembling a postmodern White House crowned with a blue Faberge egg—he called. support for bitcoin mining among other topics. President Gasim-Jomart Tokayev responded with skepticism, citing its high energy consumption, people familiar with the meeting said.
As Genesis Digital grew and bitcoin prices soared, Mr. Bankman-Fried’s appetite grew. In early 2022, Alameda invested $550 million in the company. It was part of an investment round totaling $670 million, according to people familiar with Genesis Digital.
According to those individuals and Cypriot corporate records, the proceeds were used to purchase the shares of only two co-founders, Messrs. Krohn and Makhat. Records show that 70% of the shares transferred from founders to investors are from Mr. Makhat. Both men remain shareholders in the company, according to corporate records.
The sale, a so-called secondary sale in which founders or early investors sell some of their stock to other private investors, was large by industry standards, though the practice gained popularity in 2021 as the startup market heated up.
Months later, Alameda put up another $500 million. This time it was for newly issued shares, and the money will be used to expand Genesis Digital’s operations. In total, Mr. Bankman-Fried’s hedge fund invested more than $1.1 billion, according to Alameda company filings. This gave Alameda a 20% stake, according to Cypriot registration records.
In a statement to Kazakh media in June, Genesis Digital highlighted “rigorous compliance procedures” in Mr Bankman-Fried’s operations.
Mr. Bankman-Fried told other investors he liked companies like Genesis Digital because they were a different way to bet on bitcoin’s future, according to people familiar with the matter.
And bitcoin miners have taken a liking to Kazakhstan, especially after China banned most bitcoin mining.
In mid-2021, the former Soviet republic was estimated to be home to about one-fifth of the world’s bitcoin mining, according to the Cambridge Bitcoin Power Consumption Index, a tool developed by the University of Cambridge research center. Genesis Digital had an installed capacity of 280 megawatts, equivalent to the consumption of about 100,000 US homes, the company reported to the Kazakh government. The company told local media in mid-2022 that Kazakhstan accounts for a quarter of its business.
Recently, the local government became wary of the strain the cryptocurrency industry was putting on the power grid and cut off power to some miners. The director of the country’s Ministry of Digital Development and Innovations, Janibek Mukhamejanov, said that starting this month, he increased the tariff for the use of electricity for crypto-currency traders by more than 20 times.
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Genesis Digital’s investors urged the company to move away from Kazakhstan sooner The company had previously planned, according to its investors. Some of the money it got from Alameda went to new data centers in Texas and South Carolina. The company’s investors said that most of its production is currently carried out in the United States.
Mr. Bankman-Fried resigned from Genesis Digital’s board on Nov. 10 under pressure from fellow investors, according to some people familiar with Genesis Digital. FTX filed for bankruptcy protection the next day.
– Caitlin Ostroff contributed to this article.