The BlockFi fire sale of $25 million did not happen. Instead, FTX upped its revolving credit facility to the crypto lending startup from $250 million to $400 million and acquired an option to purchase BlockFi for $240 million.
As a reminder, BlockFi was once valued at $5 billion in private markets and claimed to be on pace for revenues of $475 million last year. Its 2020 revenue was reported to be $100 million. That means the current figure for its worth is a steep loss for investors in its series D last year.
For some, the dramatic change in BlockFi’s valuation is occasion for schadenfreude about crypto. But that misses the point. The steep fall in BlockFi’s worth is an example of the capricious nature of private market valuations. Analytical rigor is sacrificed for rosy future projections to justify handing out billions of dollars to firms that produce little or no revenue.
In BlockFi’s case, the firm claims to have weathered the current downturn in crypto markets much better than other others. According to BlockFi CEO Zac Prince, the firm suffered losses of $80 million due to its exposure to Three Arrows Capital.
In some respects, the outcome is a satisfactory one for BlockFi and its customers. FTX’s stake in the company is subordinate to client funds meaning its stake will not take precedence over customer funds, if BlockFi is bankrupted. Within the current crypto climate, when freezing customer withdrawals is the norm, BlockFi’s move is an exception of sorts.
Three Arrows Capital Contagion
The 2007 Lehman Brothers bankruptcy set in course a tumble of institutions, culminating in a full-blown financial crisis. It resulted in regulation and bailouts. Crypto’s Lehman moment might be bankruptcy of Three Arrows Capital, the hedge fund that supposedly had a hand in most crypto companies.
But the full extent of its effect is not yet known. Volatility is promised and another crypto giant is supposed to fall this week. Which company will the tentacles of 3AC’s growing crisis ensnare next?
Coindesk published a report Friday about TPS Capital, an over-the-counter (OTC) trading desk operated by Three Arrows Capital. TPS’s transactions have raised suspicions. It has a significant stake in the Grayscale Bitcoin Trust (GBTC) but the company’s ownership structure is unclear. According to the Coindesk report, there is a third unknown co-owner of TPS Capital. Questions are also swirling about its underreported income. Last week, authorities in Singapore rapped 3AC for reporting false information in its filings.
Tether Reduces Holdings of Commercial Paper
Meanwhile, Tether, the world’s most trustworthy and transparent stablecoin, put out a blogpost stating that its commercial paper holdings will reduce to $3.5 billion from the current $8.4 billion because $5 billion worth of paper holdings will expire on July 31. Accounting for these holdings, as with everything else relating to Tether, is unclear.
On March 31, 2022, the company declared that its commercial paper and certificates of deposit were worth $20 billion. At the reporting date, $18.8 billion worth of commercial paper had an expiration date of between 0-90 days, meaning all holdings in this category should have expired latest by June 30. It is not clear whether the company has invested in fresh commercial paper that expires on July 31 or whether the new holdings figure represents a previous tranche of commercial paper that is supposed to expire on that day.
The overall supply of Tether in the market has also declined. Some say that the supply decline is an end of quarter gambit that skew the accounting for its reserves. Once the quarter ends, the company will resume printing unbacked tokens, they say.