July 6, 2022 | Issue #227

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Editor's Note: As a heads up, the team at CoinSnacks will be offline next week as we'll be doing some long-overdue traveling. Expect our next issue to drop on Wednesday, July 20th.

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MUST READS

Voyager Digital Files For Bankruptcy

Voyager Digital, a public Canadian-based crypto lender and exchange, just filed for bankruptcy late last night. This falls on the heels of Three Arrows Capital (3AC), a hedge fund, filing for bankruptcy earlier this week.

While it's still a developing story, the news comes as a surprise for many.

By now, we're almost all aware of the ongoing liquidity crisis, with companies dropping like flies seemingly everyday. Furthermore, we're almost all aware that, lending companies specifically, have been feeling the pressure more than most.

But Voyager Digital, after several reassurances, was supposed to be safe. They even received additional support from SBF’s Alameda Ventures last month by reaching a definitive agreement for a $200 million cash/USDC and 15,000 BTC revolver.

Which leads us to the question: so, what the heck happened now?

Unfortunately, it's tough to say at the moment as details continue to rollout, but it's safe to assume that neither SBF/Alameda nor Voyager anticipated 3AC (now bankrupt) to default this quickly.

As a result, Alameda is now being listed as the #1 unsecured creditor instantly losing at least $75 million of the credit it has already extended. While SBF's efforts did help Voyager support cascading customer orders and withdrawals, the whole bailout attempt – at least right now – looks like one big swing and a miss.

We even have rumors spreading now that, because Voyager is bankrupt, Alameda (the same company who was trying to save the firm) owes Voyager $376 million from a previous loan. This has raised several serious questions and concerns, as pointed out here.

While the details are making our heads spin at the moment, we can say with full confidence that this, once again, goes back to mismanaged funds on behalf of Voyager, and the good-ole domino effect from 3AC and asset prices across the board collapsing.

Another thing that is clear: This is going to be a long few months for Voyager and anyone that had money with them... including Alameda.

BlockFi Update

As covered in CoinSnacks last week, BlockFi was "up for grabs" with multiple parties trying to acquire the distressed, fetid assets of the crypto lender.

Having been a VC darling, sporting a $5 billion valuation with plans to go public in July 2021, the company ended its ordeal with a term sheet to be acquired by FTX at a value of up to $680 million. The details of the deal are as such:

A $400 million revolving line of credit facility
An option to acquire BlockFi for up to $240 million based on performance triggers

If we are to believe early reports around the deal, the equity valuation could go for as low as $25 million if performance metrics are not hit. If you are interested in getting into the nitty gritty details of the deal, read this quick thread.

TLDR: How Did We Get Here Again?
As a crypto lender, BlockFi was hit hard by the recent liquidity crisis in the markets. The company apparently experienced ~$80 million in losses due to an overcollateralised loan to 3AC.

Also, it is worth remembering that nearly the entire business model of BlockFi is to provide loans to individuals looking for leverage. But when leverage is down in the markets (like it is now), it hurts the company's revenue.

Combine these two things together and customers are going to begin removing assets from the company... which is exactly what they did. Wrap this all together and you have a recipe for losses and expenses quickly outpacing and revenues.

Why is FTX Doing the Deal?
Well, beyond the stated reasons from SBF/FTX for wanting to help backstop the industry, stabilize the market, and protect customer assets, there are still several attractive (and profitable) motivations.

FTX acquires all of BlockFi's tech stack for little to nothing
FTX acquires all of BlockFi's 1 million-plus users

Let's also not discount the deal from a marketing perspective. FTX now looks like an exchange that will protect customer's interests at all costs. Beyond that, companies raising money will clamor to get FTX Ventures on their cap table, with the belief that FTX will support them in problematic times.

Overall, we have given some flak in the past to SBF/FTX for trying to be everywhere at once, but we have to give credit where credit is due. FTX's commitment to BlockFi's client base rather than their shareholder base should be lauded. BlockFi's CEO, Zac Prince stated the company was "presented with various unattractive options where client funds would take a haircut or be behind a lender in the capital stack," and therefore went with a deal from FTX where retail capital would be protected over VC investment.

What's the Future Hold?
It seems we have begun to see the beginning of the end in regards to the crypto contagion and liquidity crisis. Companies that can be saved are being saved. Those that can't are going bust. And the good ones are making what could potentially turn out to be legendary deals.

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DEEP DIVES

Nexo To Acquire Vauld

It is no secret that crypto lenders have been battered during this bear market. Lending giants Celsius, BlockFi, and Babel Finance are among the victims.

However, some crypto lenders have remained strong through the downturn. One such player is now looking to parlay this strength into a major splash.

Nexo, one of the largest crypto lenders, has signed an indicative term sheet with rival Vauld, starting the process for a potential acquisition.

Vauld: Another Casualty
Crypto lenders have shown themselves to be susceptible to contagion effects. The yields that these lenders promised were propped up by leverage. This works great when prices are going up, but fails when prices are going down. In other words, when crypto prices drop, crypto lenders suffer. Recently, prices have dropped a whole lot, and lenders have suffered along with them.

The latest member of the down-bad lender club is the Singapore-based platform Vauld.

During the bull market, Vauld was doing quite well. It raised $25 million from prestigious investors including Peter Thiel, Coinbase, and Pantera in 2021. In early May, Vauld had more than $1 billion in assets under management.

But the blowups that have plagued crypto since May have taken their toll on Vauld. The fallout from Terra, Celsius, and 3AC has caused a steep drawdown in crypto prices and a weakening of retail confidence in the market. The result? Withdrawals of $197 million from Vauld over the last 3 weeks.

Stretched to its limits, Vauld has made some difficult decisions. On June 21st, they laid off 30% of their employees. This was a prelude to the real bombshell where on July 4th Vauld halted all withdrawals, trading, and deposits and announced they were looking into restructuring options.

Nexo To The Rescue
Nexo is another crypto lender. By offering people an easy-to-use platform and strong yields, they have amassed an impressive $4 billion in assets. Fortunately for them, they were able to derisk from their DeFi positions before the recent crash. Because of this, Nexo is much more liquid than its competitors with their assets at a greater than 1:1 ratio to liabilities. This strength presents significant possibilities for Nexo.

Not even 24 hours after Vauld’s announcement, Nexo started the process for a potential acquisition. The indicative term sheet presents a plan to acquire up to 100% of Vauld and grants Nexo 60 days to exclusively conduct due diligence.

The Race For Lending Dominance
This is not Nexo’s first attempt to buy out a struggling competitor. In June, they made a failed attempt to purchase Celsius’s assets. Their repeated attempts at acquiring competitors lead to a natural question: Why?

The answer is simple – although they are struggling right now, crypto lenders still present a big opportunity in the future. It was just last year that BlockFi was valued at $5B and Celsius was valued at $3.5B. In the right market conditions and with the right management, other crypto lenders may reobtain their previous valuations.

This is based on the belief that crypto lenders will continue to play a big role in the future. As crypto adoption grows, so does the need for platforms that are easy for users to borrow money from and for lenders to receive a strong yield. It’s unreasonable to expect new entrants to hop right into complex DeFi protocols. By providing a friendlier entry point for new crypto converts, crypto lenders are primed for future success.

By acquiring Vauld, Nexo doesn’t just gain a foothold in the important Asian and Indian markets but also begins to position itself for lending dominance. However, they aren’t the only ones looking to gain a foothold in this market. FTX has reportedly signed a deal to purchase BlockFi (see above), crypto lender Ledn wants to do the same, and Goldman Sachs has its sights set on Celsius.

However this all turns out, it’s clear that this is a field worth watching.

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REGULATORY FRONT

SEC Rejects GBTC Conversion Bid; Grayscale Files Suit

Immediately after hitting send on last week's CoinSnacks issue, we received reports that the SEC had denied cryptoasset management firm Grayscale Investments' bid to convert the Grayscale Bitcoin Trust (GBTC) into a spot bitcoin exchange-traded fund (the SEC also denied Bitwise's application on the same day).

Since launching CoinSnacks in 2017, the story around a potential bitcoin ETF and particularly one offered by Grayscale, has been one of our most covered stories. As we wrote on June 9th around Grayscale gearing up for this decision:

Simply, not only would a bitcoin ETF bring an enormous amount of eyeballs and capital into the crypto ecosystem from retail investors who may have been sitting on their hands to date, but it would also immediately close GBTC's discount to Net Asset Value (NAV) that is currently ~30%. If approved, this means that investors in GBTC would immediately make 30% on their investment as the gap between where the trust trades today and its true value closes.

This is why the SECs rejection is such a hard blow. Furthermore, it is why Grayscale immediately filed suit against the SEC.

What happens next is unknown, but it's safe to say this battle is far from over.

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