Vulture investors appear to be circling damaged crypto lenders and investments, with news breaking over the weekend that firms ranging from cryptocurrency exchange FTX to investment banking giant Goldman Sachs are looking to snap up assets at fractions of their value.
And with the crypto market tumbling and the venture firms that were once doling out cash by the truckload looking a lot more cautiously at bottom lines and growth potential, terms are becoming a lot tougher — and investors with the capital to extend lifelines becoming a lot more ruthless, willing to see not only other institutional investors but also retail investors wiped out.
Case in point, the motives of FTX CEO Sam Bankman-Fried, who last week was presenting himself as crypto’s savior, offering distressed firms a lifeline “even if it is at a loss to ourselves” to protect the crypto industry, started sounding a lot less altruistic over the weekend.
On Saturday, after a recording of a fund-raising call by crypto investment firm Morgan Creek Digital leaked to news outlet CoinDesk, it came out that Brinkman-Fried’s $250 million “line of credit” to struggling crypto lender BlockFi would effectively wipe out all shareholders and venture investors — and even make employees’ options worthless — by allowing FTX to buy the struggling lender at “at essentially zero price.”
Morgan Creek’s managing partner admitted on the call that its move had a 10% chance at best of succeeding — no one’s feeling like jumping on a risky bet.
Circling the Weak
Added to that, there are broader signs of crypto investors with solid balance sheets looking to take advantage of weakened firms.
News broke late Friday (June 24) that Goldman— which recently got into crypto itself, opening a trading desk for clients — was tapped by a group of buyers looking to raise $2 billion to snap up the assets of crypto lender Celsius in either a distressed asset or outright bankruptcy sale.
Celsius, which is in far worse shape than BlockFi, started out as a run-of-the-mill crypto lender, providing loans for overcapitalized collateral, which is a fairly risky business that often sees collateral of 150% or more of the amount borrowed liquidated due to crypto price crashes.
Chasing returns to support the 18% interest rate it was paying 1.7 million retail investors who locked in funds for Celsius to loan out, it apparently moved too far and too fast into the deeper, even less stable world of decentralized finance (DeFi) investing. Celsius started pursuing riskier and riskier investments such as yield farming, which can involve strings of leveraged investments, and then ran into a liquidity crisis when the market turned soured even as fears of a deep recession became more real, the Financial Times reported recently.
On June 14, a better capitalized crypto lender, Nexo, offered to buy up Celsius’ remaining assets — meaning the still-overcollateralized loans on its books — at bargain basement prices, giving the firm just seven days to accept. Instead it turned to Citigroup to help find investors and to a restructuring law firm.
Another Bankman-Fried firm, Alameda Research, offered struggling crypto broker Voyager Digital, a $500 million line of credit. It’s a company the firm has already invested in, pushing its stake up past 11% last month when Voyager’s stock was above $2.75. On Friday, it was trading at 66 cents, down some 96% year to date, The Wall Street Journal reported.
Voyager was hurt after crypto hedge fund Three Arrows Capital, which was indirectly hurt itself by May’s $48 billion stablecoin collapse, was unable to make massive loans to several firms, including $675 million to Voyager. And in the circle of life, BlockFi was one of the lenders that liquidated Three Arrows’ collateralized loans, helping send it toward potential insolvency.
True to Form
The issue isn’t limited to crypto as the economy shows growing signs of moving from overheated right into what could be the deepest recession in decades. Speaking of the tech economy more broadly, The New York Times’ DealBook editor, Andrew Ross Sorkin, said on the newspaper’s Sway podcast Monday (June 27) that any company that doesn’t have solid earnings is going to find itself struggling.
“Some of them may survive, but venture capitalists are going to turn into vulture capitalists,” he said. “And they’re going to come in and try to buy them on the cheap.”
Citing Warren Buffet’s line that “when the tide goes out, you get to see who’s swimming naked,” podcast host Kara Swisher noted that the “crypto bros were making fun of him because he was like, ‘I don’t get this, essentially.’ And they were sort of doing the, ‘Oh, old man doesn’t get this,’ kind of stuff.”
Which shows that it’s never wise to laugh at Buffet, who in May said he “wouldn’t buy all of bitcoin for $25.”
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