Suspicions emerge of major losses at crypto lender BlockFi

Suspicions emerge of major losses at crypto lender BlockFi

Suspicions emerge of major losses at crypto lender BlockFi

Leaked documentation purported to have originated at BlockFi suggests that the lender may have incurred substantial losses over the course of the past two years.

The document - an income statement with data related to the past two years of trading and projections over the next two years - was leaked by Twitter account @blane9171. Further analysis of the document - demonstrating losses at BlockFi of $285 million over the course of 2020 and 2021 -  has been provided by @otterooo.

In the wake of the Celsius debacle and major losses at prop trading firm Three Arrows Capital (3AC), the crypto community is on heightened alert for signs of contagion or of similar risk management failures. @otterooo has been focusing particular attention on CeFi crypto lenders recently - having gotten out ahead of the difficulties at Celsius  a couple of weeks prior to it suspending withdrawals.

It’s important to note that the validity of the document has not been confirmed. Exodus News has contacted BlockFi and will update this article upon receipt of a response.

Bull market losses

@otterooo has calculated that despite the bull market over the course of the past two years, BlockFi recorded losses of $63.9 million and $221.5 million in 2020 and 2021. Bull market conditions should be much more favorable to crypto lending platforms. On that basis, the analysis considers how much more likely BlockFi is to turn a profit in a crypto bear market and against the backdrop of really challenging macroeconomic conditions.

Further data analysis questions why with wallet assets of $467 million and yield assets of $13.5 billion, BlockFi seemingly only had 3.4% of funds on reserve with the rest on loan or invested. Whilst on-chain data is transparent, the business operations of CeFi lenders such as BlockFi and Celsius are far more opaque and difficult to unravel.

BlockFi pursues a different trading model to Celsius in that 70% of funds are of institutional origin rather than retail. In a point that he underscores as speculative, @otterooo ponders whether retail investors would be treated in the same way as institutional and professional investors in relation to attempts at redemption in the event of a ‘run’ on the service.

Even if the suspicions are hypothetical at this juncture, this is the latest in a long line of unfortunate episodes that underscores the importance of self-custodial wallets in DeFi.

Adverse trading conditions

The New Jersey-based crypto lender has had some setbacks recently. Earlier this year, it agreed to pay $100 million in fines to the SEC. Last week it announced a decision to reduce headcount by 20%. It also emerged that the lender was looking to secure funding but at a dramatically reduced valuation by comparison with its last funding round.

Adam Back, CEO of Blockstream, has speculated that the company may have pursued an arbitration yield strategy related to Grayscale’s GBTC product. In better times, there was a premium to be had but the yield has turned negative and currently stands at -34% by comparison with the Bitcoin spot price.

BlockFi was a lender to 3AC, and it’s thought that BlockFi has liquidated at least some of 3ACs positions. BlockFi CEO Zac Prince has stated that the company has foreclosed on “a large client that failed to meet its obligations”.

Included in the leaked data is a term sheet for the sale of preferred stock of up to $85 million. Given the losses believed to have already been incurred and projected losses of $104 million for 2022 (according to the data analysis), BlockFi may have some tricky financial waters to navigate in the immediate future should this data turn out to be legitimate.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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