Genesis Faces Huge Losses, BlockFi Liquidates $1 Billion in Loans, Celsius Suffers Risky Model
Another day of bad news one after another spreading across the cryptocurrency market.
Details of BlockFi's liquidation of $1 billion in 3AC loans also emerged today as Three Arrows Capital was ordered into liquidation by a UK court, with the aftermath of the bankruptcy in part leaving lender and market maker Genesis Trading facing "digital losses". billions of dollars” in losses.
Meanwhile, lending platform Celsius, which may face bankruptcy, is still not open for withdrawals. Celsius was revealed to have a high risk of 19 to 1 asset-to-equity ratio before encountering liquidity problems this year.
Celsius' high-risk business
Celsius operates a high-margin, high-risk business whose value has skyrocketed in 2021, according to documents reviewed and reported by The Wall Street Journal (WSJ) on June 29.
Celsius, which bills itself as a less risky alternative to banks, had an equity ratio of $19 billion to $1 billion in assets midway through last year, while also making many undercollateralized loans, according to documents prepared ahead of its most recent equity fundraising.
Asset equity ratio refers to the proportion of company assets contributed by shareholders. This ratio usually represents the degree to which a company has taken on debt to finance financing, and a higher ratio often indicates that a company has used a lot of financing and debt to maintain operations.
This ratio varies by industry and also depends on the assets held by specific entities, however the 19-to-1 ratio is already high due to Celsius's exposure to cryptocurrencies, leverage and loans, thus posing additional risks.
“That’s a high-risk architecture,” said Eric Budish, a crypto economist at the University of Chicago Graduate School of Business, who likened Celsius’ operations to those of financial firms before the 2008 housing bubble:
“It’s like diversifying your mortgage portfolio in 2006. Only then it was housing, now it’s cryptocurrency.”
There are reports that Voyager Digital has sent Celsius more than $174 million over the past few months. This week, analytics platform Nansen confirmed the deal, but it was unclear what the nature of the funding was or whether it was a loan.
Genesis faces hundreds of millions of dollars in losses
Digital Currency Group's market maker and lender Genesis Trading is reportedly facing hundreds of millions of dollars in losses.
Those losses were partly related to the company’s exposure to 3AC and cryptocurrency lender Babel Finance. Genesis faced losses head-on and still hoped to be partially repaid, with other losses offset through hedging. Its chief executive, Michael Moro, said the firm mitigated its losses through "a large counterparty that failed to meet margin calls".
"We sold our collateral, hedged the downside and moved on. Our business continues to operate as normal and we are meeting the needs of all our clients."
The Battle for BlockFi
A leaked investor call from hedge fund Morgan Creek Digital confirmed that an unnamed large client that BlockFi liquidated on June 16 was 3AC.
During the conference call, Morgan Creek managing partner Mark Yusko and co-founder Anthony “Pomp” Pompliano said BlockFi “reported” the loan to the firm as being worth $1 billion and was 30 percent overcollateralized.
Pomp went on to say that roughly two-thirds of the $1.33 billion in collateral was in Bitcoin (BTC), and that 3AC was immediately liquidated if it failed to repay. The other third is said to be about $400 million worth of shares in the Grayscale Bitcoin Trust (GBTC).
The Grayscale Bitcoin Trust is designed to be pegged to the spot value of bitcoin, however it often trades at a premium or at a discount.
According to Pomp, BlockFi had trouble unwinding its position, as the discount on GBTC dropped to around 34%, and the price dropped as the firm sold off its holdings.
FTX reportedly plans to buy a stake in BlockFi after issuing a $250 million revolving line of credit to BlockFi, and the call also discussed how Morgan Creek could raise $250 million to buy a 51% stake in the company. This figure would value BlockFi at just $500 million, well below the $5 billion valuation it reported in June 2021.