Three Arrows Capital and BlockFi may lose in the same place

According to market rumors, after Celsius and Three Arrows, the next one to fall into a liquidity crisis will be BlockFi.

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On June 15, Theblock said that the total liquidation of Three Arrows Capital on lending platforms such as Deribit and BlockFi reached $400 million. The price of Ethereum has repeatedly touched the liquidation line of Three Arrows Capital’s debt in AAVE. On the same day, PeckShield monitored that the addresses related to Three Arrows Capital were liquidated more than 10,000 ETHs. A mere $600 million liquidation limit tripped up Three Arrows.

All indications show that Three Arrows Capital and BlockFi are not insolvent, but the assets they own are not liquid enough. When they encounter an investment failure or a user run, they cannot even take out a fraction of their assets to supplement collateral or In response to user redemption, it encountered a serious liquidity crisis.

According to SEC data, as of March 31, 2022, Three Arrows Capital had assets equivalent to 38,888 BTC in GBTC, and BlockFi had assets equivalent to 19,852 BTC, worth more than $2.7 billion at that time.

So it is very likely that the huge assets of Three Arrows Capital and BlockFi are trapped in GBTC.

Grayscale has been fighting for the SEC to allow the conversion of GBTC into a spot ETF before thinking about it, and even threatened to sue the US SEC. This may also have pressure from Three Arrows Capital and BlockFi.

Below the grey line, Three Arrows Capital and BlockFi may lose to GBTC.

Let’s analyze:

  • GBTC was created as a trust and can be traded on OTC Markets, allowing investors to own Bitcoin. 1000 shares of GBTC = 1BTC (minus the management fee).
  • Users can buy GBTC shares on the exchange at market prices, or they can invest 1BTC spot to get 1,000 GBTC shares.
  • But if BTC is exchanged for GBTC, BTC will stay there forever. It’s like a BTC black hole, only getting in and out. Or 1000 shares can be redeemed for 1BTC after GBTC gets SEC approval to convert to a spot ETF.
  • Due to investors’ interest in BTC in 2019-2020, the price of 1000 shares of GBTC is 37% higher than that of 1BTC.
  • Then an arbitrage opportunity arises, buying a lot of BTC and exchanging it for GBTC shares. Or if you’re BlockFi, you could theoretically take depositors’ BTC and exchange them for GBTC for an immediate 37% paper return.
  • Both Three Arrows Capital and BlockFi injected a large amount of BTC into GBTC, and the highest value of BTC locked in GBTC once exceeded $2 billion.
  • The SEC has repeatedly refused to turn GBTC into an ETF.
  • Over time, arbitrage opportunities become less and less and eventually become negative. The current price of 1 bitcoin is about $20,000, but 1,000 shares of GBTC are about $12,500, a negative premium of 37.5% , and GBTC liquidity is very poor.
  • According to the SEC, as of March 31, 2022, Three Arrows Capital and BlockFi held substantial positions in GBTC. Three Arrows Capital 38,888 Bitcoins, BlockFi 19,852 Bitcoins. It was worth more than $2.7 billion at the time.

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  • The May debacle of Terra/Luna set off a chain reaction that has so far crashed Terra, Celsius, and Three Arrows.
  • People are trying to withdraw BTC from BlockFi.
  • BlockFi cannot exchange depositors’ BTC because they are all trapped in GBTC.
  • GBTC typically trades several million shares per day. When its daily trading volume soared to 10-13 million shares for a while, BlockFi likely dumped a lot of GBTC shares in the market to raise funds while driving down the GBTC price. Customer redemptions were then processed by buying BTC on the open market, losing over $10,000 per bitcoin.

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  • BlockFi CEO Zac Prince took to Twitter to reassure clients by telling them that BlockFi has no exposure to GBTC stock as they “exited major positions in the fall of 2021.”

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  • But SEC filings show that BlockFi held GBTC stock on March 31.

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  • The U.S. SEC fines BlockFi $100 million for selling illegal securities.
  • BlockFi raised a valuation of $1 billion last week, far lower than the previous valuation of $3 billion, and only raised $50-80 million.
  • As for Three Arrows Capital, as of March 31, they still held shares in GBTC. If they held these shares now, they would face a loss of around $800 million, which could actually be much larger, since there is no market liquidity for GBTC stock. When GBTC sells off, the GBTC price is likely to be close to $0, so a loss of $1.2-1.6 billion is possible.
  • Meanwhile, Grayscale, the company that runs GBTC, has been fighting for the SEC to allow GBTC to be converted into a public-facing spot ETF, even threatening to sue the U.S. SEC.

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Summarize the above information:

Because GBTC is not an ETF and cannot redeem BTC from Grayscale, Three Arrows Capital and BlockFi have a total of billions of dollars of Bitcoin assets trapped inside, resulting in Three Arrows Capital being unable to withdraw assets to supplement the mortgage rate of the $600 million liquidation amount , BlockFi was unable to deal with user redemption, and encountered a liquidity crisis.

Conversely, if GBTC were an ETF, they might be enough to deal with a liquidity crisis. This also explains why Grayscale has repeatedly asked the US SEC to convert GBTC into an ETF. Because it is likely that Grayscale is under pressure from big clients such as Three Arrows Capital and BlockFi.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/three-arrows-capital-and-blockfi-may-lose-in-the-same-place/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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