SBF To The Rescue: BlockFi and Voyager
As the crypto market contagion spreads, FTX loans out hundreds of millions to two of the largest yield-generating shops in the space. What does this mean for BlockFi and Voyager?
Read last week’s issues here:
Monday’s issue - Celsius Exchange Halts Withdrawals: What Went Wrong?
Tuesday’s issue - Celsius And stETH - A Lesson On (il)Liquidity
Wednesday’s issue - Three Arrows Capital Faces Liquidation
Thursday’s issue - Fears of Further Contagion
Friday’s issue - 3AC And The Leaning Tower Of Babel
The Sam Bankman-Fried (SBF) FTX and Alameda Research rescue tour is well underway in the broader cryptocurrency space, with both BlockFi and Voyager taking $250 million and $200 million loans respectively from SBF company bailouts.
“I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion” - SBF on the state of the exchange/lendor ecosystem.
Currently, very few of the bitcoin and “crypto” yield-generating counterparties look to be solvent or safe — whether that’s reinforcing messaging to clients, complete shutdowns in services or efforts to raise cash to cover deposit liabilities. As price draws down, risks are exposed and the liquidity tide goes back out, we’re finding out which institutions will survive this new environment and which ones took on too much risk.
Today, FTX announced a $250 million revolving line of credit, or injection, to BlockFi in an effort to help them “navigate the market from a position of strength.” This bailout comes at a time when BlockFi has been in the process of closing an additional funding round at more than an 80% discount compared to their previous $5 billion-plus valuation just last year. They have also reduced their staff by 20% this month.
In BlockFi’s case, the loan will be used to strengthen the balance sheet with some unclear, legal language on how that supports client deposits, highlighting that,
“The proceeds of the credit facility are intended to be contractually subordinate to all client balances across all account types (BIA, BPY & loan collateral) and will be used as needed.”
The Voyager deal is $200 million credit and 15,000 BTC with 5% interest through 2024. Voyager’s press release highlights that,
“The proceeds of the credit facility are intended to be used to safeguard customer assets in light of current market volatility and only if such use is needed.”
This comes at a time when the Voyager stock is down nearly 91% year-to-date and their staking rewards token, VGX, is down 81% relative to bitcoin’s 54% drawdown.
Now, there’s nothing inherently wrong with companies going out to the market and raising extra capital in an attempt to survive the unfolding bear market, but it does raise red flags about the health of each business, the safety of customer deposits and the deleveraging contagion risks of the entire industry.
Injecting more liquidity into large, troubled players as an attempt to stop further bank runs and instill market confidence is in FTX’s best interest. Another institutional blowup means yet another major selloff and death-spiral event for bitcoin and broader cryptocurrency assets. This comes at a time when all three institutions are trying to grow their retail customer base so a healthy, sustainable industry (along with higher prices) is good for business.
What this does imply is that most users who park their bitcoin into these custody and yield-generating services are taking on much higher risk than they realize or are compensated for. One of bitcoin’s greatest attributes is the self-custody properties that completely remove counterparty risk. If anything, these bailouts will provide customers time and an additional chance to reevaluate their deposits in light of the latest Celsius situation.
Loan-to-Own(?)
Due to the terms of the credit line not being made 100% public for either situation, nothing is definitive, but given the place creditors hold in a standard capital structure, FTX and Alameda have essentially formulated buyout terms if the balance sheets/liquidity profile of Voyager and BlockFi become more impaired.
If the companies are functionally insolvent, or their balance sheets are impaired as depositors flee, the companies will likely fold into FTX subsidiaries with yet-to-be-known terms.
Biggest Red Flags
Earlier this week BlockFi’s income statements leaked on Twitter.
BlockFi had an operating income of -$63.93 million and -$221.5 million in 2020 and 2021 respectively, losing money during years where the bitcoin and broader crypto market exploded upwards. Similarly, Voyager lost $8.41 million in 2020 and has a trailing-12-months operating income of -$36.48 million.
The need for liquidity by both businesses after a month of collapses, margin calls and insolvencies should come as no surprise, especially given that both companies have bled money over the last two years. When equity rounds are no longer attractive due to the rapidly contracting liquidity tide, debt is the only way forward.
What readers should really question is whether the risk-reward tradeoff for users to custody on the platforms is truly worth it, and how the two companies lost money over the previous two years as the crypto markets melted upwards.
Final Note
Given the nature of the last two weeks specifically, we strongly recommend that users get their funds into their own custody.
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Once upon a time, I was an employee at BlockFi. I think if they push their credit card really hard during the next couple of years, they might be fine. Compared to Coinbase or other large "exchanges," BlockFi doesn't stand a chance right now, because "trading" on BlockFi is not worth the fees. Who else has a bitcoin rewards credit card from a relatively reliable U.S. company though?
Great analysis