I previously journaled a bit about the BlockFi insolvency (which continues to unfold). The summary is BlockFi had a razor thin equity layer backing a highly levered balance sheet (with the assets being speculative crypto coins).
Today the WSJ reported that Celsius, “a giant on a pitch that it was less risky than a bank with better returns for customers.” I remember looking at a company called Eco, which promised ~4-5% yields on cash, but with a murky explanation as to where the income was sourced from, though it was clear it was from derived from crypto activities. It seemed too good to be true, and I suspect Celsius was a high octane version. Apparently Celsius redirected *revenue* back to customers in the form of yield – driving double digit cash yields.
Back to the leverage, the WSJ indicated that the company had $19B of assets and $1B of equity. Yikes. I say *had* because it’s obvious now that the old school Wall Street restructuring guard are in the mix (Alvarez & Marsal), meaning they are likely near or completely insolvent right now.
What to learn of this? The story of bubbles and bubbles popping are a feature of human psychology and groupthink. While it is happening, it’s really hard to know if there is excess and whether you are the odd person out missing the boat. However in retrospect, the story is often the same, with overstretched expectations fueled by leverage that is hard to see from the outside. But alas, here we are and it’s likely we will continue to see crypto ecosystem constituents reveal themselves as insolvent due to leverage in the system.
Sources:
https://www.wsj.com/articles/defis-existential-problem-it-only-lends-money-to-itself-11656503840