Silver linings of the Crypto Crash

Crisis may ultimately reveal that the supply of Bitcoin is scarcer than it appears.

The tragedy of the current “Crypto” crisis is that Bitcoin is being punished for the sins of SBF — never mind that the demise of FTX does not in any way discredit the value proposition of Bitcoin. On the contrary, FTX was everything Bitcoin is not.

The crisis has triggered a wave of margin calls, liquidations and panic selling, sending the Bitcoin price sharply lower. That is a natural first-order effect, as people question the merits of cryptocurrencies and declare the death of Bitcoin.

There is widespread belief that a cascading crisis will trigger a flood of further Bitcoin liquidations, as exchanges, lenders and funds fail one after another. But how much further can it go?

3AC, Voyager, Celsius and now FTX/Alameda are all in or entering liquidation. But what they all have in common — contrary to what the layperson would intuitively believe about crypto companies — is that they all hold preciously few bitcoins on their balance sheets.

It is staggering that FTX listed 0 bitcoin on its balance sheet, against $1,4 billion of bitcoin liabilities. But, what that obviously means is that there will be no bitcoins to auction off from the ashes of FTX.

3AC was estimated to have around $4 billion worth of assets when it went bankrupt in April — at current market prices it may be half the value or less now.

I don’t know the composition of the 3AC’s remaining assets. But what is sure is that 3AC did not possess the 15,250 bitcoins it owed to Voyager, which in turn sent that firm down:

Pursuant to the 3AC Loan, Voyager agreed to lend 3AC 15,250 Bitcoins and 350 million USDC; 3AC drew down on the entire 3AC Loan. After the Luna crash in 2022, Voyager initially requested partial repayment of the 3AC Loan, and subsequently requested full repayment by June 27, 2022. 3AC did not honor either repayment request. 3AC’s nonpayment, among other things, resulted in Voyager filing its own chapter 11 case in the United States Bankruptcy Court for the Southern District of New York on July 5, 2022.

That is quoted from the bankruptcy filing of Celsius, the week after Voyager went down. Celsius’ original filing on July 14th listed a $1,2 billion gap between assets and liabilities. By August that gap had widened to $2,8 billion, as the value of assets fell and liabilities swelled.

A court filing in August showed that Celsius held only 14,578 BTC (~$250m at current prices), (+ 23,348 wrapped bitcoins, for whatever they will be worth), against 104,962 BTC (~$1,75b at current prices) that it owes to clients and creditors. The result of this is of course that people own way less actual bitcoins than they believed they owned.

On Nov. 10th Celsius filed a motion to extend the exclusivity period to work out its own reorganisation plan. So it remains unclear what will happen to the failed lender’s [smallish] stack of Bitcoin, but it is unlikely to unleash huge selling pressure on the market when Celsius’ assets are auctioned off.

On Nov. 11th Voyager announced that it is reopening the bidding process for its assets, now that the “$1,4 billion” sale to FTX is of — or $51 million, which was the actual amount of cash to be paid. What will happen with BlockFi, which was also supposed to be taken over by FTX, is also up in the air again. I don’t have the exact figures, but it appears unlikely that any of these companies hold more bitcoins on the asset side than the liability side of their balance sheets.

Of course the crisis may continue to cascade and engulf other players. appears to be next in line for a run on the bank. holds approx. $800 million worth of Bitcoin, according to Nansen, around a third of its total digital coin holdings. Further rounds of forced bitcoin selling can absolutely not be ruled out.

Still, it appears (with provisos of course) that the end result of the domino of falling crypto companies will not be too flood the market with bitcoins, but rather to demonstrate that the supply of actual bitcoins in circulation is much scarcer than the fractional reserve operations of FTX and the other ponzis have given the impression of. That may ultimately turn out to be the silver lining of the crypto crisis.

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