FTX to buy BlockFi: but why so cheap at $25 million?

I wrote here last week that cryptocurrency has a contagion problem, with a slew of firms caught up with overleveraged balance sheets and weak risk management.

BlockFi had just taken a $250 million revolving credit facility with FTX, which for those who aren’t fluent in corporate-speak, is essentially a fancy term for “bailout”.

Now, FTX is primed to buy the embattled firm for the rather underwhelming total of $25 million.

Rumour or Confirmed?

Cryptocurrency can be like a high school cafeteria at times, with rumours flying around at a relentless speed, so let’s try to dig through the noise and pinpoint what exactly is happening here. First, the thought was that FTX was merely acquiring an option on BlockFi’s equity, then news broke it was an outright (and sizeable) portion of equity, before now it seems that a term sheet is about to be completed for the whole enchilada.

The prevailing number floating around is $25 million, although certain sources are pointing towards a $50 million figure. What is not in doubt, however, is that the buyout – whether it’s $25 million or $50 million – is pennies on the dollar when looking at BlockFi’s valuations historically.

In March 2021, BlockFi closed its Series D funding round at a valuation of $3 billion. Three months later in June 2021, they were reportedly raising funds at a $5 billion valuation. Bloomberg then reported three weeks ago that the firm was aiming to raise funds at a $1 billion valuation. And now, as the calendar flicks from June to July, I’m digging into the story of FTX purchasing the firm for a paltry $25 million.

To quote my roommate when I exploded a bottle of ketchup last month, what the f**k?

To show this visually, I plotted these BlockFi valuations against the price of Bitcoin. I’m not going to lie, the graph is disgusting.

So why the fall?

Everything is obvious in hindsight, but the aggressive nature of businesses like BlockFi was a recipe for disaster. Despite marketing themselves as “crypto lenders” who pay a yield on customers’ deposits, in reality these firms have acted as highly aggressive hedge funds. Customers trusted these firms to invest their money, they just didn’t realise it, which says something about the state of the hysteria in the crypto bull market as money poured in from all angles.

But markets humble everyone, and that’s exactly what has happened here. BlockFi were far too aggressive and displayed a total lack of risk management. While not as fatal as fellow crypto lenders Celsius and CoinFlex, both of whom were forced to pause withdrawals to shore up their liquidity crises, as well as Three Arrows Capital who is facing liquidation, BlockFi is very much in last chance saloon.

The covert nature and lack of regulation mean we can’t be certain what was on BlockFi’s balance sheet, but in all likelihood, it was filled to the brim with highly correlated crypto instruments. When these assets began to fall in unison – which historically has always been the case in crypto crashes – BlockFi’s equity position was decimated.

What turned this dire situation into a full blown crisis was then the fact that customers exacerbated the strain on BlockFi by running for the doors all at once, withdrawing funds and testing the liquidity of BlockFi’s reserves.

Reports are also claiming that up to 80% of BlockFi’s workforce could be let go as the firm scrambles to cut costs. Sam Bankman-Fried and FTX, who have positioned themselves as a sort of IMF of the crypto world – a lender of last resort – are now staring down the barrel at a $25 million takeover to try to revive the firm.

While $25 million is the number making headlines, there could easily be a shedload of debt and murky liabilities, meaning the real number is a lot higher. But again, regulation and transparency is simply not here so this amounts to conjecture.

BlockFi’s CEO Zac Prince did contest the $25 million valuation being floated around as “rumours”. Elsewhere, after details from an investor call were leaked suggesting FTX could convert its loans to BlockFi into equity without restraint, a BlockFi representative argued this clause was “highly speculative”.

Personally, the only thing I find speculative here is whether BlockFi survives this mess. What customers are going to trust this bank hedge fund with their savings again?

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