BlockFi Bankruptcy In The Latest FTX Casualty

Key takeaways

• Crypto platform BlockFi has filed for Chapter 11 Bankruptcy in New Jersey, citing exposure to FTX as a major factor in their collapse.
• BlockFi has stated in their filings that they have billions in liabilities and over 100,000 creditors.
• It’s the latest major crypto casualty of the FTX failing, with companies such as Sequoia Capital and Paradigm writing off hundreds of millions in invested funds, and others such as Genesis experiencing liquidity crisis’ of their own as a result.

And the hits keep coming. BlockFi was in the news earlier in the year after announcing widespread layoffs, and now it looks like the staff who’d managed to keep their jobs are going to be on their way out as well.

The cryptocurrency exchange and DeFi platform has filed for Chapter 11 bankruptcy with the United States Bankruptcy Court today, stating that they have over 100,000 creditors and liabilities in the billions. Included in the filing is an outstanding loan of $275 million which was made to FTX US.

Customer withdrawals have been suspended, meaning customers with balances on the platform are going to be unlikely to access their funds for quite some time, if ever.

In the filing, BlockFi stated that they have “significant exposure to FTX and associated corporate entities.”

It’s the latest in a long string of dominos that have fallen off the back of the FTX situation. There’s FTX themselves, as well as Sam Bankman-Friends trading company Alameda Research, and now BlockFi.

There are many other companies who have been hit hard by the situation, including Genesis, Greyscale, Sequoia Capital and Paradigm.

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BlockFi has been on borrowed time

BlockFi has been on shaky ground for a while and they looked close to collapse earlier this year. Ironically, it was FTX who threw them a lifeline at the time, providing a $250 million revolving credit facility and even reportedly entering talks of buying them out.

The company had been heavily impacted by the crash in crypto prices and the arrival of a new crypto winter. In a blog post from the founders of the company, Zac Prince and Floria Marquez, stated that the dramatic shift in the macroeconomic environment had created the need for a rapid scale back in spending.

This included laying off around 20% of the workforce, as well as reducing marketing spend, executive compensation, non-critical vendors and slowing new hiring.

As with most other cryptocurrency exchanges at platforms, BlockFi’s revenue is driven by activity. The more crypto that is being traded and staked, the more money they earn. With the bear market hitting and trading volumes drying up, companies like BlockFi have seen their revenue plummet.

The FTX contagion continues

Prior to their sudden collapse, FTX had been seen as one of the most blue chip companies in crypto. They’ve been responsible for bailing out and acquiring a huge number of other companies within the sector, which is why the damage from their bankruptcy has been so widespread.

The list continues to grow by the day. Cryptocurrency prime broker Genesis has been one of the biggest causes for concern, requesting a $1 billion emergency loan to avoid a liquidity crunch. They didn’t get it, and withdrawals were halted as a result.

The firm’s lending programs are utilized by many other cryptocurrency exchanges such as Gemini, which was founded by Cameron and Tyler Winklevoss.

We may need to wait some time before we see the full fallout of the situation. FTX has declared bankruptcy alongside its 130 affiliated companies. Sam Bankman-Fried has been ousted as CEO and John Ray has taken his place.

Despite taking control of Enron after their filing for bankruptcy, Ray has stated that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

One of the key issues at hand is that there appears to have been very little in the way of accounting and record keeping. As you’d expect, this makes it incredibly difficult to gain an overall understanding of where the company’s liabilities lie and which external stakeholders are likely to be impacted by the collapse.

According to the most recent filing, FTX estimates they could have as many as 1 million creditors, ensuring that the bankruptcy process is likely to be a complex and messy process.

What does this mean for crypto?

With BlockFi the latest to fall, what does this mean for the rest of the crypto world? Well obviously there’s no crystal ball here, but it’s showing just how fragile the balance sheets of many crypto businesses are.

In many cases numbers are being inflated through the valuation of illiquid internal assets, such as was the case the FTX’s own token, FTT.

This is likely to result in far more scrutiny being placed on crypto exchanges and DeFi platforms to prove their corporate reserves, and this is a change that’s being pushed by many figures in the community, such as Binance CEO Changpen Zhao (CZ) and Coinbase CEO Brian Armstrong.

The reality is that many crypto investors are going to feel incredibly wary of crypto off the back of this carnage. There have been significant losses felt across the sector, and now even those who’ve made money may find their assets locked on an exchange and potentially lost forever.

There is almost certain to be further regulation in the space, and in a few years time the cryptocurrency landscape is likely to look quite different than it does today.

So far, it’s companies that have straddled the line between crypto and traditional finance that appear to have survived the best. As a listed company, Coinbase is an example of the benefits of regulation and transparency.

While they haven’t been immune from the crypto volatility and have had to lay off a large number of staff, they appear (so far) to be stable and likely to survive through the crypto winter.

What does this mean for investors?

Look, if you’re burned from crypto, we don’t blame you. It’s getting mighty tough out there and we’re not likely to see a swift turnaround any time soon. So we’ve got a couple of options for you.

First, if you want to invest in crypto despite all the craziness, there are ways you can do this that allow you to potentially minimize (but not eliminate) your risk. In our Crypto Kit, we use AI to invest in digital currencies via the use of public trusts.

This allows you to get the potential upside of investing in cryptocurrency like Bitcoin, Ethereum, Litecoin and Chainlink, while having some protection of investing in these through a regulated trust.

You also have the added benefit of AI technology, with our algorithm predicting which of these trusts is likely to perform the best in the coming week on a risk adjusted basis, and then automatically rebalancing the Kit based on these projections.

If you’re keen on tech but don’t want to go all in on crypto, our Emerging Tech Kit has some exposure to crypto, as well as investing across tech ETFs, large cap tech stocks and growth tech stocks.

Again, our AI puts you in the box seat here, using the prediction power to allocate funds across these four verticals, and then to specific holdings within each.

It’s like having your very own AI-powered hedge fund, right in your pocket.

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