Genesis faces huge losses, Celsius had a risky model, and much more

Genesis faces huge losses, Celsius had a risky model, and much more

It’s been another day of watching the waves of contagion spread through the cryptocurrency market.

Following the liquidation order of Three Arrows Capital (3AC) by a British court, on Thursday also Details have emerged about BlockFi’s liquidation of a $1 billion loan to 3AC, and the fallout from the insolvency was partly to blame as lender and market-maker Genesis Trading faced losses of “a few hundred of millions of dollars”.

Withdrawals remain suspended on possibly insolvent lending and borrowing platform Celsiuswhich has been revealed to have a very risky 19-to-1 assets-to-equity ratio before running into liquidity problems this year.

Celsius’s risky business

According to documents reviewed and picked up by the Wall Street Journal (WSJ) on Wednesday, Celsius was trading on very thin and risky margins as it rose in value throughout 2021.

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

Asset-to-equity ratio refers to the proportion of a company’s assets that have been financed by shareholders. This ratio is often an indicator of how much a company borrows to finance its operations, with higher ratios often indicating that a company has drawn on significant financing and debt to stay afloat..

The ratios differ from one sector to another, as do the assets held by specific entities. Nevertheless, Celsius’s already high 19-to-1 ratio is seen as an additional risk due to the company’s exposure to cryptocurrencies, leverage and lending.

Eric Budish, a cryptocurrency economist at the University of Chicago Business School, stated that “it’s just a risky structure.”and compared Celsius’s operations to those of financial firms in the run-up to the 2008 housing bubble:

“It seems to me that it is diversified in the same way that mortgage portfolios were diversified in 2006. Everything was housing; here everything is cryptocurrencies.“

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. Nevertheless, the nature of the financing or whether it is a loan is unclear.

Genesis faces losses of hundreds of millions

Digital Currency Group’s lending and market making firm Genesis Trading faces hundreds of millions of lossesaccording to sources collected by the DCG Coin Desk publication.

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The losses are related in part to the firm’s exposure to 3AC and cryptocurrency lender Babel Finance. Genesis is putting a brave face on the losses and is still hoping for partial refunds, with other losses being offset by coverage. CEO Michael Moro said the firm had mitigated losses with “a large counterparty that did not honor a margin call to us”:

“We sold the warrants, covered our downside and moved on. Our business continues to function normally and we are meeting all the needs of our customers.”

The 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 liquidated immediately once 3AC was unable to make the refunds.. The other third is said to have been in Grayscale Bitcoin Trust (GBTC) shares worth around $400 million.

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

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..

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

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