Contagion in Crypto Land
Voyager reveals massive exposure to troubled crypto hedge fund 3AC
The past two weeks has brought not one but two massive deleveraging events in crypto with the now seemingly imminent falls of crypto lender Celsius and crypto hedge fund Three Arrows Capital (3AC). Forced liquidations brought BTC below it’s 2017 top of $19,700 and ETH below $1,000. As of writing both assets have reclaimed those key levels, but as we’re about to cover below it seems there are still shoes to drop here, particularly in the case of 3AC.
Plenty of ink has been spilled covering Celsius and 3AC so I want to focus this post on Voyager, given I’ve been shilling their 9% rewards on USDC on this blog. You can read my previous post about Voyager counter-party risk here.
This morning Voyager put out a press release detailing their exposure to 3AC:
Voyager concurrently announced that its operating subsidiary, Voyager Digital, LLC, may issue a notice of default to Three Arrows Capital ("3AC") for failure to repay its loan. Voyager's exposure to 3AC consists of 15,250 BTC and $350 million USDC. The Company made an initial request for a repayment of $25 million USDC by June 24, 2022, and subsequently requested repayment of the entire balance of USDC and BTC by June 27, 2022. Neither of these amounts has been repaid, and failure by 3AC to repay either requested amount by these specified dates will constitute an event of default. Voyager intends to pursue recovery from 3AC and is in discussions with the Company's advisors regarding the legal remedies available. The Company is unable to assess at this point the amount it will be able to recover from 3AC.
The stock was down 52.5% in Wednesday trading on the news and the market cap now sits at about $114 million USD ($148 million CAD).
Thankfully, this bomb comes on the heels of Voyager announcing last Friday after market close that they had secured a $500 million revolver from Alameda Research, who led Voyager’s $60 million private placement a month ago (ironically, 3AC also participated). Alameda Research is the crypto quant-trading firm founded by FTX founder and CEO Sam Bankman-Fried.
Indeed, if news of the 3AC exposure had gotten out to the market before Alameda stepped in with a backstop it might have been game over for Voyager. And to be clear, it still might be given the exposure and probable loss of customer confidence, but I think given the significant backing from Alameda they survive and, most importantly, even if they don’t I think customer assets will be safe.
But there are a couple safeguards customers can put in place to protect themselves until this resolves:
USD deposits on Voyager are FDIC insured. Any USD held on the platform is safe. If you hold USDC on the platform and you want to wait this situation out, you can trade your USDC for USD with no slippage and forgo a couple weeks of interest. I recommend doing so, and have done so myself.
I was also able to withdraw BTC from Voyager this morning as usual. There have been a few customer complaints on Twitter of not being able to withdraw funds but Voyager has promptly been responding to them and, far as I can tell, is processing withdrawals as usual.
The other thing to note here is that, even if we didn’t know about Voyager’s ~$650 million 3AC exposure at the time the loan from Alameda was secured, Alameda certainly did and they judged that if Voyager had the short-term liquidity to get through the 3AC exposure that they would ultimately be able to make it. The loan comes with a 5% annual interest rate (with fed funds at 1.75%) so it’s not like Voyager is raising on draconian terms (for context, Airbnb took on debt at 11% interest in the throws of the corona panic in March 2020 when rates were at 0). On the other hand, since Alameda holds an equity stake of 11.56% of Voyager, this is a related-party transaction.
Indeed, given the friendly terms of the loan and Voyager’s June 14 press release saying they were in a safe position from a toxic counterparty perspective (covered below), when the news broke of the $500 million credit facility last Friday my thinking was that Voyager was being pro-active in strengthening their liquidity position given market volatility, and I actually went in to the weekend more confident in their position despite the 3AC meltdown occurring.
Also relevant to the full picture here is BlockFi secured a $250 million loan facility from Alameda sister company FTX at the same time Voyager received $500 million. Given that BlockFi had just tweeted that they had liquidated all 3AC collateral and had no more exposure, I figured Voyager was in a similar position given the concurrent capital injections from SBF and, again, the press release. Wrong!
Obviously, in hindsight, Voyager wasn’t being pro-active in seeking the $500 million injection but rather reacting to massive toxic 3AC exposure. Unfortunately, Voyager was not pro-active in liquidating 3AC collateral like BlockFi was and now look like they’re going to be on the hook. It’s unfortunate to say the least…
Nonetheless, it does seem like SBF got a peak under the hood at both of these shops, saw the 3AC and related exposures, decided it was manageable with a short-term liquidity injection, and made the decision to step in to try and stem contagion resulting from the 3AC bad debt. We’ll see if the gambit pays off.
Although Voyager stock was down big today as one would expect, crypto prices were soft but still holding key levels on the news. Call me a perma-bull but I read this as bullish. One of things I tend to look for in finding a market bottom is a big, scary headline hitting the wire and prices rallying in the face of it. That is a sign that there is simply no more sellers. We got this in the equity market last week with a rally off the 75 bps rate hike, and although I wouldn’t call what we saw in crypto today a rally, I feel like sentiment and prices easily could have broken down to new lows on this news and that they didn’t offers some relief.
Did Voyager Lie?
The most disappointing thing out of Voyager from all of this is that the company either outright lied about their exposure or was simply incompetent and didn’t know what it was. On June 14 they put out a press release in response to the Celsius crisis (emphasis mine):
Voyager differentiates itself through a straightforward, low-risk approach to lending and asset management by working with a select group of reputable counterparties, which are all vetted through extensive due diligence by its Risk Committee. The company does not participate in DeFi lending activities, algorithmic stablecoin staking and lending, or derivative assets, such as stETH. One of Voyager's important objectives is to make crypto as simple and safe as possible for consumer use. With that mission in mind, safeguarding customer assets is a top priority.
Now, the most charitable interpretation of this is that Voyager was unaware of what risks 3AC was taking, given that they obviously knew their exposure to 3AC. Never attribute to malice what you can attribute to incompetence.
However, if you’re lending $650 million (financed out of your customer’s deposits!) to a single counterparty and that counterparty is participating “in DeFi lending activities, algorithmic stablecoin staking and lending, or derivative assets, such as stETH” — YOU ARE PARTICIPATING IN DEFI LENDING ACTIVITIES, ALGORITHMIC STABLECOIN STAKING AND LENDING AND DERIVATIVE ASSETS SUCH AS stETH TOO!
Your risk and exposure is a function of your counterparty’s risk and exposure, and it was deceitful and unethical to put out this press release when they knew they had massive exposure to 3AC.
Please feel free to reach out to me directly to discuss further if you’d like, and remember:
Not your keys, not your coins
Counterparty risk is real risk
Disclosure: the author owns Voyager’s VGX token, BTC and ETH.
Disclaimer: nothing published in this newsletter is investment or financial advice. The author may be long or short any of the securities or assets discussed at any time before or after publishing.