Genesis Faces Huge Losses, BlockFi’s $1B Loan, Celsius’s Risky Model

It has been another day of watching the waves of contagion ripple through the crypto market.

With Three Arrows Capital being ordered liquidated by a British court, details also emerged today of BlockFi liquidating a $1B loan to 3AC, with the fallout from insolvency partly to blame as the lending firm and creator of Genesis Trading market will face losses of “a few hundred million dollars”.

Withdrawals remain suspended at possibly insolvent banking and lending platform Celsius, which was revealed to have a highly risky 19-to-1 asset-to-equity ratio before running into cash-strapped this year.

Celsius’s risky business

According to documents reviewed and reported by the Wall Street Journal (WSJ) on June 29, Celsius was trading on very small and risky margins as it rose in value during 2021.

According to documents prepared before the latest capital increase, Celsius, which claimed to be a less risky alternative to a bank, had an asset-to-equity ratio of $19 billion to $1 billion as of the middle of last year, while issued many loans that were undercollateralized.

Asset-to-equity ratio refers to the proportion of a company’s assets that has been financed by shareholders. The ratio generally represents an indicator of how much debt a company has leveraged to finance its operations, with higher ratios often suggesting that a company has used substantial financing and debt to stay afloat.

The ratios differ from sector to sector, as do the assets held by the specific entities, however Celsius’s already high ratio of 19 to 1 is considered more risky due to the company’s exposure to cryptocurrencies, the leverage and loans.

Eric Budish, an economist versed in crypto at the University of Chicago business school, claimed that “it’s just a risky structure,” as he compared Celsius’s operations to those of financial firms in the run-up to the housing bubble. from 2008:

“It seems to me as diversified as mortgage portfolios were diversified in 2006. It was all housing, everything here is crypto.”

Reports also surfaced that Voyager Digital has sent more than $174 million to Celsius in recent months. The transactions were confirmed by analytics platform Nansen this week, however the nature of the financing or whether it is a loan remains unclear.

Genesis faces losses of hundreds of millions

Digital Currency Group market maker and lending firm Genesis Trading is reportedly facing losses in the hundreds of millions according to sources briefed by DCG publication Coin Desk.

The losses relate in part to the firm’s exposure to 3AC and crypto lender Babel Finance. Genesis is putting a brave face on the losses and is still hoping for partial refunds, with other losses offset by coverage. CEO Michael Moro said the company had mitigated losses with “a large counterparty that missed a margin call for us.”

“We sold collateral, covered our downside and moved on. Our business continues to operate as normal and we are meeting all of our customers’ needs.”

Battle for BlockFi

A leaked investor call from hedge fund Morgan Creek Digital confirmed that BlockFi’s June 16 liquidation of an unidentified large client was 3AC.

During the call, Morgan Creek managing partner Mark Yusko and co-founder Anthony “Pomp” Pompliano stated that BlockFi had “informed” the firm that the loan was worth $1 billion and 30% overcollateralized.

Pomp went on to state that roughly two-thirds of the $1.33 billion collateral was in Bitcoin (BTC) and was immediately liquidated once 3AC failed to make the refunds. The other third was said to be in Grayscale Bitcoin Trust (GBTC) shares worth around $400 million.

The Grayscale BTC Trust is designed to be pegged to the spot value of BTC, however it often trades for a premium or discount.

Related: The court of the British Virgin Islands would have ordered to liquidate 3AC

According to Pomp, BlockFi had trouble liquidating the position as GBTC’s discount fell to around 34%, and the price dropped when the company went to sell the holdings.

With FTX reportedly planning to buy a stake in BlockFi following the issuance of a $250 million revolving credit facility to the company, the call also discusses how Morgan Creek was looking to raise $250 million to buy 51% of BlockFi. the company. Such a sum would give BlockFi a valuation of just $500 million, well below its reported $5 billion valuation in June 2021.