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Contagion: Genesis faces huge losses, BlockFi’s $1B loan, Celsius’s risky model

A leaked investor call from Morgan Creek Digital suggests BlockFi liquidated 3AC for $1 billion, while Celsius reportedly maintained a highly risky assets-to-equity ratio last year that may have caused its recent liquidity woes.

It’s been another day of watching the ripples of contagion spread through the crypto market.

With Three Arrows Capital being ordered into liquidation by a British court, details have also emerged today of BlockFi liquidating a $1B loan to 3AC, and the fallout from the insolvency was partly to blame for lending firm and market maker Genesis Trading facing losses of “a few hundred million dollars."

Withdrawals remain suspended at the possibly insolvent lending and borrowing platform Celsius, which was revealed to have had a highly risky 19 to 1 assets-to-equity ratio before it ran into liquidity troubles this year.

Celsius’ risky business

According to documents reviewed and reported on by the Wall Street Journal (WSJ) on June 29, Celsius was operating on very fine and risky margins as it ballooned in value over 2021.

According to documents prepared before the last equity raise, Celsius, which claimed to be a less risky alternative to a bank, had an assets-to-equity ratio of $19 billion to $1 billion midway through last year, while also issuing out many loans that were undercollateralized.

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

The ratios differ from sector to sector, as do the assets held by the specific entities, however Celsius’s already high 19-to-1 ratio is seen as extra risky due to the firm’s exposure to crypto, leverage and lending.

Eric Budish, an crypto-versed economist at the University of Chicago’s business school stated that “It’s just a risky structure,” as he likened Celsius’ operations to that of financial firms in the lead up to the 2008 housing bubble:

“It strikes me as diversified as the same way that portfolios of mortgages were diversified in 2006. It was all housing— here it’s all crypto.“

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

Genesis facing hundreds of millions in losses

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

The losses relate in part to the company’s exposure to 3AC and the crypto lender Babel Finance. Genesis is putting a brave face on the losses and still has hope of receiving partial repayments, with other losses offset by hedging. CEO Michael Moro said the firm had mitigated losses with “a large counterparty who failed to meet a margin call to us.”

“We sold collateral, hedged our downside, and moved on. Our business continues to operate normally and we are meeting all of our clients' needs."

Battle for BlockFi

A leaked investor call from hedge fund Morgan Creek Digital confirmed the liquidation of a large unnamed client by BlockFi on June 16 was 3AC.

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

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

Grayscale’s BTC trust is designed to be pegged to the spot value of BTC, however it often trades for either a premium or a discount.

Related: British Virgin Islands court reportedly orders to liquidate 3AC

According to Pomp, BlockFi ran into troubles liquidating the position as the GBTC discount dropped to around 34%, and the price went down as the firm went to sell the holdings.

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

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Weiss Ratings issues warning over crypto mortgage risks

Weiss analysts are wary over the usage of volatile crypto assets as collateral for long-term property loans.

Florida-based ratings and research firm Weiss Ratings has fired out a warning over the risks of crypto mortgages amid the current economic climate in the United States.

The company paid particular focus to Milo, a digital banking startup from Miami that offers 30-year mortgages backed by Bitcoin (BTC), Ethereum (ETH), or stablecoins as collateral. The firm requires zero down payments, and its loan rates vary between 3.95% and 5.95%.

In the May 3 report, Weiss analyst Jon D. Markman urged caution with such mortgages, citing the poor performance of stocks and crypto this year, a U.S. housing bubble, rising interest rates, and the Federal Reserve's upcoming policy changes.

“The product seems to be like a win-win, assuming real estate and crypto prices keep rising ... except there are signs both bets are unlikely to be winners in the near term. Bitcoin is off by 40% since it reached $66,000 in November 2021.”

“And U.S. property prices now face headwinds from a change in Fed policy and rising mortgage rates,” he added.

Markman did conclude that not all crypto risk is bad, but it could be in the property sector, before adding “no matter what the markets are doing, the potential to succeed in cryptocurrencies is real.”

Many crypto and stock investors have been negatively anticipating the potential market impacts of serious interest rate hikes this year as the Fed aims to reel in inflation.

With both markets suffering from a lackluster performance due to a myriad of factors, macro analysts such as Alex Krueger have boldly suggested that the Fed’s latest announcements set for this week “will determine the fate of the market” moving forward.

Removing the housing market from the equation, if the price of BTC or ETH were to plunge significantly over the next few months, there does appear to be a fair amount of wiggle room for Milo users, however.

According to the mortgage terms and conditions, the price of the collateralized crypto assets “can dip in value with zero consequence as long as it doesn't dip to 35% of the total loan amount.” To avoid liquidation, users must top up their collateral within 48 hours of hitting the minimum percentage. While stablecoins could also be utilized in times of market volatility.

Related: Bitcoin ‘bear market’ may take BTC price to $25K, says trader with stocks due capitulation

Milo raised $17 million worth of Series A funding in March and has plans to develop its mortgage products to meet larger demand, along with upping its headcount.

However, Markman also raised concerns that Milo’s “larger plan is to pool crypto-backed home loans and offer them as bonds to asset managers and insurance companies,” likening it to behavior that resulted in the 2009 housing market crash.

“It's an interesting strategy … but given current market conditions, investors should be skeptical, especially with financial stocks. All of this should sound familiar. Pooling risky home loans, then selling them to unsuspecting asset managers, was the recipe for the Great Recession of 2009.”

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Digital bank Anchorage offers Ethereum-backed loans to institutions

Institutional investors can get USD on credit without liquidating their ETH.

Crypto custody bank Anchorage Digital is expanding its services into crypto-backed loans for institutional investors.

Clients at Anchorage can now access a line of USD credit backed by Ethereum through its partnership with U.S. commercial bank BankProv.

Anchorage Financing will introduce a simple way for investors to put their Ethereum holdings to work, enabling them to access USD to meet their needs without liquidating their holdings according to the announcement. The crypto custodian also offers staking services for additional yields on Ethereum

The digital asset bank holds on to the ETH, using it as collateral should a client be unable to repay the dollar loan. Clients with large ETH holdings will be able to access a larger line of credit. Anchorage already provides Bitcoin-backed loans through other capital providers.

Ethereum-backed loans may be under collateralized if the borrower passes appropriate risk due diligence checks according to Anchorage co-founder Diogo Mónica.

Dave Mansfield, CEO of BankProv, said that Anchorage’s collateral management tech is “world-class”, adding that it is a trusted partner to the banking industry:

“We firmly believe in our mission and belief that the crypto market should be afforded the same access and rights to traditional financing tools as any other legal, well-capitalized and compliant business in America.”

Anchorage was the first crypto firm to receive a charter from the U.S. national bank regulator in January 2021. BankProv is the tenth oldest bank in America, operating for over 200 years as The Provident Bank before a rebrand in 2020.

In late February, Anchorage raised $80 million in a Series C funding round led by GIC, Singapore’s sovereign wealth fund, with participation from Andreessen Horowitz, and Blockchain Capital. The funding helped the custodian to assist institutions by bringing crypto to their users and diversifying their corporate treasuries.

In late March, Anchorage teamed up with cryptocurrency trading platform Prometheum to launch a fully regulated alternative trading system, or ATS, tailed specifically for professional crypto investors.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Crypto-collateralized loans may soon bring new investors to space

"Traditional lending services generally do not exist in the digital currency industry, which means there aren’t many lenders for investors to choose from,” said Jon Melton.

Institutional investors will soon be able to receive Bitcoin-collateralized U.S. dollar loans through Silvergate Capital Corporation — the holding company of pro-crypto institution, Silvergate Bank.

According to an announcement from Silvergate, Coinbase Custody will be the custodian for loans funded through the bank’s Silvergate Exchange Network, or SEN. The network will provide access to capital through U.S. dollar loans collateralized by Bitcoin (BTC) while Coinbase holds the crypto in cold storage.

"Traditional lending services generally do not exist in the digital currency industry, which means there aren’t many lenders for investors to choose from," said Jon Melton, Silvergate director of digital asset lending. "Our relationship with Coinbase Custody offers institutional investors increased access to capital efficiency so they can take advantage of market opportunities in the digital currency industry."

Silvergate will offer loans starting at $5 million with an initial 12-month term. Such loans could augment or replace traditional funding rounds for firms looking to enter the crypto space.

Since first announcing it would explore offering crypto-collateralized loans in 2019, Silvergate’s annual revenue has more than tripled, from $30 million to $91.5 million. The bank said at the time that its clients had significant interest for Silvergate "to be involved in the custody and transfer of digital assets between customers."

In the fourth quarter of 2020, CEO Alan Lane said the bank would be expecting “increased demand” for these loans in 2021. Though the number of digital currency deposits grew by $2.9 billion over the same period, the price of Silvergate Capital Corporation stock has been volatile in the first quarter of 2021, reaching an all-time high of $176.27 on Feb. 16 but falling 40% within three weeks. At the time of publication, NYSE:SI is valued at $148.90.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say