Sam Bankman-Fried’s FTX might acquire BlockFi

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Sam Bankman-Fried’s FTX is wrapping up a deal that will result in FTX acquiring BlockFi, the digital currency lending, and borrowing platform. It is rumored that the deal is worth $275 million (a $250 million unpaid emergency line of credit + an additional $25 million to close the acquisition), a fraction of the $4.8BN Series E valuation it received in July 2021.

With 99% of BlockFi’s previous valuation evaporating in the deal, BlockFi’s equity investors are taking a significant loss on the company; among these investors is Anthony Pompliano (Pomp), whose firm Morgan Creek Digital Assets, invested in BlockFi at a $3 billion valuation.

https://twitter.com/sobylife/status/1542564541279510528?s=20&t=Iblk9i9iFcPb38Ehwrk0gQ

Today I'm announcing a new investment in @BlockFi.

They have raised $350 million at a $3 billion valuation. This is another step towards becoming a generation defining business for @BlockFiZac and @FounderFlori.

You can sign up here: https://t.co/Sm50uH0tNw pic.twitter.com/BSxCZUnCAA

— Anthony Pompliano 🌪 (@APompliano) March 11, 2021

How did this happen?

BlockFi was engaged in several high-risk activities and relationships. According to DitchBlockFi, a team that was dedicated to exposing BlockFi’s non-transparent and risky practices to BlockFi users, BlockFi had over $2 Billion worth of unsecured loans to proprietary trading firms—it was later revealed that Three Arrows Capital (3AC) was one of these trading firms. In addition, BlockFi used its user’s deposits to create GBTC shares, which were selling at a premium at one point in time but are now selling at a roughly 30% discount as of press time.

Ultimately, these business activities made BlockFi a high-risk business. DitchBlockFi warned its audience that “even if these are very successful [proprietary] trading firms, defaults will happen and BlockFi is the central counterparty for every retail depositor as well as every corporate borrower. Since we understand that many of their loans are concentrated, $100M+ sized loans, a single default can easily wipe out BlockFi’s equity base and put them into insolvency,” and that is exactly what happened when it was revealed that 3AC was insolvent.

When 3AC’s financial troubles were publicized, rumors began to circulate that BlockFi was a counterparty to 3AC. BlockFi CEO Zac Prince announced that they had liquidated a counterparty (3AC) that failed to meet its borrower obligations.

BlockFi can confirm that we exercised our best business judgment recently with a large client that failed to meet its obligations on an overcollateralized margin loan. We fully accelerated the loan and fully liquidated or hedged all the associated collateral.

— Zac Prince (@CostSegZac) June 16, 2022

Sam Bankman-Fried to the rescue

Although BlockFi claimed that they had properly managed risk and that no client funds were impacted, shortly after Prince tweeted, Sam Bankman-Fried announced that FTX was “injecting $250m into BlockFi and partnering with them so they can navigate the market from a position of strength.”

1) Today we’re injecting $250m into BlockFi and partnering with them so they can navigate the market from a position of strength.https://t.co/nocsdi0GLF

— SBF (@SBF_FTX) June 21, 2022

This caused the public to begin to doubt BlockFi’s financial well-being. Afterward, it became publicized that BlockFi was raising money at a $1 billion valuation—$3.8 billion less than its valuation in July 2021.

Without it ever being revealed just how much financial trouble BlockFi was having, rumors began to circulate that FTX was closing in on a BlockFi acquisition deal. However, neither BlockFi nor FTX has commented on this matter.

It is believed that in addition to the $250 million emergency credit line that FTX extended to BlockFi, FTX will be paying $25 million to close the deal. However, BlockFi CEO Zac Prince says:

“I can 100% confirm that we aren’t being sold for $25M.”

Lots of market rumors out there – I can 100% confirm that we aren’t being sold for $25M.

I encourage everyone to trust only details that you hear directly from @BlockFi.

We will share more w you as soon as we can.

— Zac Prince (@CostSegZac) June 30, 2022

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