FTX lashed - where is BlockFi’s half-life?

“Instead of decentralization of finance, we choose a centralized unregulated bank like system.”

- u/GaryJulesMCOC[1]

Been trying to make sense of all that’s come out recently. It is pretty complicated and filled with contradicting statements and numbers thrown around. Now, don’t get me wrong, like everyone, I would like nothing more than for this to pass over smoothly. However, we can fear (not afraid to use the word when I should) another slamming effect on the whole crypto industry like in June, and most importantly, on us plebs, who as you know, always get the shortest end of the stick. Hope for the best, but…

Here’s where we are today:

There are reports of MAJOR[2] issues with withdrawals from FTX. They’ve been loading up their withdrawal wallets with 50 million, which were gone in seconds. Here’s the links: USDC[3] USDT[4]. FTX seems to have run out of stables, yet BlockFi depends on it, having passed its assets to SBF.

Binance are liquidating any[5] remaining FTT on their books. This comes after a report FTX's liquidity appeared to be[6], well, worryingly solidifying.

Now to understand how this ties and applies to BlockFi, let’s take a step back to where it all began…..

The 2022 Liquidity Crisis and why BlockFi is dependent on FTX.

What happened then :

• Starting May 2022, the crypto market faced a massive liquidity crisis when multi billion dollar companies lost up to 99% of their value in a few weeks: These include Terra LUNA, Celsius, 3AC, Voyager.
• In mid-June, BlockFi liquidated 3AC[7]. The company was a strategic investor[8] in BlockFi between 2020-21m according to an article on BlockFi’s website. BlockFi lent bitcoin to Three Arrows Capital[9]. When GBTC was trading at a premium to its Net Asset Value (NAV), 3AC earned profits arbitraging this premium by depositing bitcoin directly with Grayscale and waiting a few months to vest trust units of GBTC. Here’s a Tweet[10] visualizing what I’m saying.
• BlockFi didn’t directly address the situation. Instead Zac Prince posted a Twitter[11] thread on their risk management practices, assuring customers that no funds were impacted. The company’s relationship with 3AC and Grayscale was not discussed.
• In 2022, according to projections, BlockFi is expected to lose a further ~$104m, equal to losing ~$285,000 a day. [12]
• Also, the Private Shares Fund has slashed valuations[13] of BlockFi series E warrants to “worthless” compared to a valuation of $67 per unit in April. As revealed in their report at the end of June, the private fund also downgraded BlockFi’s preferred shares valuation to $20 per share, down from $77 just three months ago.
• As a result of the liquidity crisis, BlockFi announced a term sheet with FTX US[14]. A $400M revolving credit facility which is subordinate to all client funds, and an option to acquire BlockFi at a variable price of up to $240M based on performance triggers.
• In August, the deal was formalized[15]. What was not made public however, was what BlockFi must do to earn that amount, and how far it is from those goals. And nobody accurately revealed how little Bankman-Fried’s company could end up paying.

Basically, a bail out from FTX was in place. So far so good (let’s say). “Funds safu”. However, following that a few more strange things started happening. Namely:

• Exiting[16] BlockFi are David Olsson, global head of institutional distribution; Samia Bayou, global head of private client investors; and Shane O’Callaghan, senior director of institutional sales for Europe, Middle East and Africa, sources told CoinDesk.
• According to data[17] from Addictive Tips, BlockFi fired 20% of its workforce.
• Just recently, it became public knowledge that BlockFi[18] is reportedly facing potential losses of up to $80 millions due to exposure to crypto miner Core Scientific. Since their stock was down as much as 77%, a bankruptcy is very likely. In this scenario holders of Core’s common stock could suffer “a total loss of their investment”. Now, BlockFi’s term sheets are not publicly available, but a Reddit[19] post alleged that BlockFi offers loans of larger than €10 million with a 10% bitcoin deposit along with collateral against equipment. You do the math.

Let’s for the sake of the argument, say things are still okay(ish). As long as daddy SBF has the funds to back all of this up, it shouldn't be an issue, right? Right. Now let’s take a step back and take a closer look at daddy’s business recently.

Amid big talk from Sam that he was in considering joining Elon Musk on the twitter[20] deal, and after FTX also got involved in bailing out Voyager[21], which I’m sure you’re aware of, this comes out:

• The Texas[22] State Securities Board is investigating crypto exchange FTX US, its parent company FTX and its founder, Sam Bankman-Fried, over potential securities violations.

What transpired is that Alameda[23] Research, Sam Bankman-Fried’s trading firm’s Assets are Reportedly “Entirely Illiquid”. Among the assets are:

• $3.66B FTT
• $2.16B “FTT collateral”
• $3.37B crypto ($292M SOL, $863M “locked SOL”)
• $134M USD
• $2B equity securities

There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)

For comparison, there are about 197 million FTT tokens worth $5.1 billion in circulation, according to FTX’s website. To put things in perspective, Alameda Research’s assets contain $5.82B worth of FTT. FTT’s market cap as of Nov. 3 is $3.2B.

I’m guessing you know where I’m headed with this.

“Insert Michael Jackson eating popcorn GIF”

TLDR:

FTX has MUCH bigger issues than helping out BlockFi right now. Probably won’t be able to afford to be BlockFi’s sugar daddy for much longer. In fact it may be one of the bites SBF chokes on.