Voyager Digital facing insolvency, echoes of 2008 in crypto markets


2008 echoes

The crypto contagion continues to ripple.

What we are witnessing in the cryptocurrency markets is similar to what Wall Street banks went through in 2008. That is, overleveraged firms staring insolvency in the face following reckless lending and boundless greed during a historic bull run.

The latest firm in the crosshairs is Voyager Digital, the publicly listed digital asset broker.  They were in over their head with insolvent crypto hedge fund Three Arrows Capital (3AC), revealing that the fund failed to repay a loan of $350 million in the U.S. dollar-pegged stablecoin, USDC, as well as 15,250 bitcoins, worth about $315 million at today’s prices for a total of approximately $665 million.

This sent share prices tumbling, although a quick look at the performance this year shows there are deeper problems. Voyager opened 2022 trading at $13 per share. At time of writing, it is trading at 37 cents, down 97%. Ouch.

Is Voyager insolvent?

A default notice has been issued to 3AC, but this total loan of $665 million is a staggering amount when digging into Voyager’s financials. Last Friday, the firm revealed it had approximately $137 million in USD and owned crypto assets, adding that it also had access to $200 million in cash and a USDC revolver. Finally, a 15,000 bitcoin revolver is in place from Alameda (about $500 million).

Alameda, founded by FTX CEO Sam Bankman-Fried, made an additional move, extending a loan worth about $500 million in total to Voyager (Almeda previously invested in the firm). However, as outlined above, this is over $150 million shy of the exposure to 3AC and it is unclear whether this will be enough to rescue the company from insolvency.

We are working diligently and expeditiously to strengthen our balance sheet and pursuing options so we can continue to meet customer liquidity demands

Voyager ceo Stephen Ehrlich

The odds appear long that the firm can survive this crisis and regain its footing, especially when considering the intensely bearish sentiment both in the stock market and crypto.

Terra Contagion

You may recognise some of these names, and it serves to highlight just how interconnected and systemic the risk was with these centralised platforms. 3AC’s spiral was triggered by Terra’s collapse, with founder Zhu Su even sporting the Luna symbol in his Twitter name until recently, and repeatedly promoting the coin on Twitter.

This is also the second bailout by Sam Bankman-Fried, with FTX also extending a $250 million loan to BlockFi, another crypto lender with a similar business model to Celsius – who themselves were also involved in Terra, just like 3AC (as well as getting caught in a liquidity squeeze due to the stETH discount and large leveraged ETH positions).

Alameda and Celsius were both rumoured to be involved in a potential 11th-hour bailout of Terra, and the failure to strike a deal was ultimately a death sentence for Celsius. But again, these insolvencies and bailouts serve to show how interconnected and fragile a large portion of these reckless lenders and hedge funds were.

Hero to zero

It marks the latest dark development for Voyager Digital, which took a leaf out of Icarus’ book and flew too close to the sun.

My editor, Jayson Derrick, was a Voyage investor and surmised the hype that many believers bought last year in a refreshingly honest (and entertaining!) manner:

“Voyager Digital ranks as my second worst investment ever as the stock inches closer to zero. I was encouraged by two announcements in 2021 that made it seem like a no-brainer decision to buy shares. First, the Dallas Mavericks named Voyager as the team’s ‘first official cryptocurrency brokerage and international partner’. I had assumed that Mavs owner Mark Cuban only picks winners and if Voyager is good enough for him, it should be good enough for the investment community”.

Let me just interject and say that Mark Cuban is human, something the crypto world realised when he invested in an algo-stable, Iron Finance, that went to zero overnight (think the Terra crisis, just with a smaller stablecoin). Cuban wrote an essay advocating for the stablecoin and liquidity pair mechanism which garnered him “an annualised return of about 206%” on his “initial investment of $75K”.

After it went to zero, he suddenly changed tune and advocated for stablecoin regulation, prompting the below meme to go viral.

There were other reasons that saw Voyager’s market cap propel upwards beyond a $5 billion market cap. Alameda made a strategic $75 million investment, part of the reason they are likely now scrambling to save the firm.

But it simply got worse and worse, and the lack of foresight earlier this year from Voyager’s management was jarring when the US regulators came after them for their interest-bearing products in the US. This was the same fate suffered by other companies offering similar “securities”, such as BlockFi, and many competitors responded by removing these offerings for American customers. Voyager, however, stayed the course, which was inexplicable and ultimately a massive error.

Final Thoughts

Derrick continues with his rollercoaster tale as an investor:

“Watching the stock selloff from its 2021 highs tempted me to rebuy a position in early 2022 when the stock looked really cheap. However, Voyager’s stock seemingly went downhill since the day I bought it. The selling was too much for me to stomach on March 30 when it received a cease and desist order for its interest-generating crypto business.

Selling at a huge loss erased all of my gains from the first time I bought shares. Why I re-bought the stock a third time in May 2022 is a mystery. It wasn’t a large position, but big enough to make me mad. Was Voyager just a wanna-be player in the crypto space the whole time and duped me? It sure seems like that is the investor sentiment these days”.

To me, I agree with the closing remark from Derrick. I don’t necessarily think there was anything malicious here, but Voyager over-leveraged themselves as well as failed to assess the regulatory risk of the environment they were operating in.

Much like Celsius, Three Arrows Capital and so many more, Voyager was overly aggressive and practiced poor risk management. This is a clichéd and simple conclusion but it’s true. We see this time and time again across all asset classes; it’s all well and good while the bull rages, but eventually the chickens come home to roost.

Voyager overextended themselves and now they are scrambling to stay solvent. For most investors, it has come too late.

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