More on crypto collapse; domino effect?

Yesterday I posted about the crypto meltdown and its chilling similarities to the stock market crash that began in September, 1929.  Today I found an article from June 30th (3 days ago) that sheds more light.  Source is a very pro-crypto website "The Block."

Background: "Celsius" is a "crypto lender" claiming to have 1.7 million customers and around $12 BILLION in "assets under management" as of May.  On June 12 of this year Celsius froze all customer withdrawals, citing "extreme market conditions."  Accounts have remained frozen since then.  

"FTX" is a "crypto-currency exchange" where investors can buy, trade and sell crypto-currency.  It was founded in the Bahamas just three years ago  by Sam Bankman-Fried and Gary Wang, and reportedly claims to be worth $32 BILLION....in three years....despite producing...nothing.  

"Founded in the Bahamas," ya say?  So, out of the reach of U.S. regulators.  Hmmm...

And with all the above as background, here we go....

Billionaire co-founder and CEO of FTX, Sam Bankman-Fried (2021 photo)

Crypto exchange operator FTX looked at making a deal with troubled crypto lender Celsius, but ultimately walked away...

FTX began talks with Celsius about providing financial support or acquiring the company but decided against proceeding after looking at Celsius's finances.  Sources said. Celsius had a $2 billion hole in its balance sheet and that FTX found the company difficult to deal with... Celsius did not respond to The Block's request for comment.

Celsius is resisting a Chapter 11 bankruptcy filing — a recommendation from its lawyers--and instead has been seeking a show of support from users to stay out of bankruptcy.

Celsius was founded in 2017 by current CEO Alex Mashinsky, and quickly grew by promising high interest rates to investors. The firm won over high-profile investors, including Canadian pension fund CDPQ (Quebec) and growth equity firm WestCap. Last year Celsius raised $750 million at a valuation of $3.5 billion.

To summarize: Celsius--billed as a "crypto lender"--apparently loaned money to individuals or companies to buy crypto.  The company got investors to invest "by promising high interest rates."  No idea how the company structured that:  Selling bonds to investors isn't likely due to regulatory problems.  Offering interest-bearing accounts might be possible.

So what about that "$2 BILLION hole in the company's balance sheet"?  One obvious possibility is outright fraud, like a Ponzi scheme.  But another is that the fundamentals behind this business idea only worked as long as crypto prices were rising.  When they faltered, the business collapsed.  

Next question is, how many more firms are using the same business plan--like, say, industry giant FTX?

Ah, not to worry:  Celsius was only valued at $3.5 billion, while FTX is supposedly valued at $32 billion.  Yes, FTX is in essentially the same business, but will avoid the same fate by...wait for it...buying *other* troubled crypto lenders, like BlockFi, for a fraction of their claimed value.

While FTX decided to walk away from Celsius, the exchange giant is still interested in rival crypto lender BlockFi. As The Block reported yesterday, FTX is seeking to acquire BlockFi outright after providing a $250 million revolving credit facility to the firm.

Other sources reported that FTX would acquire BlockFi--yet another "troubled crypto lender" once valued at $2 BILLION--for $240 million, or about 12 cents on the dollar.  Such a deal, eh?  Here's a company that's based on what amounts to the "junk-bond-interest-rate" business model, and FTX is snapping it up at a fire-sale price.  But how does FTX propose to turn a profit with the acquisition, since FTX is in virtually the same business?

Source.
https://www.theblock.co/post/155069/ftx-walked-away-from-celsius-deal

For a really eye-opening look at the brazenness of the folks who founded and ran Celsius, a legal team examined their "terms of service"--which apparently no investor had bothered to read!
https://www.anylaw.com/media/2022/06/29/celsius-networks-warnings-highlight-crypto-bankruptcy-risks/