BlockFi customers are concerned their bitcoin positions could be substantially impaired due to its ties with hedge fund Three Arrows Capital (3AC). Rumors of massive liquidations are fueling fears of complete insolvency at 3AC — while rumors say BlockFi has lent enormous sums of bitcoin to the firm.
The situation at 3AC is rapidly deteriorating. On top of its concerning portfolio, one of its clients has accused the fund managers of embezzlement. 8BlocksCapital claims 3AC took $1 million of its funds without explanation to answer its margin calls.
At its peak, Three Arrows Capital managed over $10 billion according to blockchain analytics firm Nansen. Today, it remains unclear if the hedge fund will keep its head above water.
3AC’s troubled investments include BlockFi, GBTC, and stETH
At the end of last year, 3AC filed a Form 13-F with the SEC disclosing ownership of over 38 million shares of Grayscale Bitcoin Trust (GBTC). If it still holds those shares, it has lost $785 million in that position year-to-date. There’s also a rumor that 3AC lost $400 million more this month in a forced liquidation.
The hedge fund is also a major stETH token holder. The ostensibly 1:1 ETH pegged derivative by Lido has broken its peg and trades at a 6% discount.
3AC is also a major shareholder in BlockFi, which just laid off one-fifth of its staff and reduced its valuation -80% from $5 to $1 billion. BlockFi has a similar business model to Celsius which halted withdrawals to avoid its own potential insolvency.
Lots of 3AC denials by executives at BlockFi and Tether
Tether denies financial ties with 3AC. Although Tether was an equity owner in Celsius, it now claims to have “liquidated without losses” all of its exposure to Celsius. Moreover, it claims to have “no exposure to 3AC.”
However, BlockFi lent bitcoin to Three Arrows Capital. 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. Now that GBTC trades at a -29% discount to NAV, 3AC’s GBTC arbitrage profitability has ended.
Worse, BlockFi is rumored to be a sizable creditor to 3AC. If 3AC becomes insolvent and enters bankruptcy or legal proceedings, BlockFi might have to wait months or years to retrieve the reportedly large sums of bitcoin it loaned to the hedge fund from a court-appointed liquidator ⏤ if any bitcoin remain.
BlockFi has not confirmed the extent of its financial dealings with the crypto hedge fund. It is unknown exactly how many bitcoin loans are currently outstanding between BlockFi and 3AC. The company maintains a policy of anonymity regarding client dealings.
Grayscale’s Barry Silbert has not commented on BlockFi nor 3AC this week.
A substantial amount of the bitcoin that customers deposited at BlockFi was directed to GBTC or 3AC. As a result, a large number of BlockFi’s bitcoin are illiquid.
As insolvency looms over Three Arrows Capital ⏤ and GBTC’s premium-to-NAV has deteriorated into a discount-to-NAV ⏤ BlockFi customers fear their bitcoin positions could be substantially impaired.
BlockFi has already lowered its asking valuation -80%. If it needs to raise more capital to meet cash obligations, or if 3AC were to file for bankruptcy, how much lower can BlockFi’s valuation go?