Ram Ahluwalia, the head of Lumida Wealth Management, has lately focused his exacting eye on notable crypto flameouts. Among them: Genesis and Celsius.
Ahluwalia recently published Twitter threads analyzing Genesis’s restructuring; he also opined on the significance of the Celsius examiner’s report. Both are former leaders in the crypto world; both have filed for bankruptcy.
On Feb. 9, Ahluwalia joined Crypto DeFined to talk about the crypto meltdowns, and what lessons these collapses provide for investors.
Five takeaways from the interview (edited for clarity):
– No major contagion risk from Genesis. When crypto lender Genesis Global, a subsidiary of Digital Currency Group (DCG), filed for Chapter 11 bankruptcy on Jan. 19, a key concern was what effect the company’s implosion would have on the crypto market. The good news, according to Ahluwalia: The “Genesis contagion risk is largely behind us. We’ve seen the creditor docket. There are no new big names that appear there, so it’s hard to see what the next domino to drop is.”
The issue for Genesis, he said, was that it was part of an unsustainable “credit loop” with BlockFi, Three Arrows Capital, Voyager and FTX — companies that were all borrowing and lending to each other.
– A bitcoin-linked security triggered the collapse of multiple firms. Genesis and other crypto firms were players in the trading loop of a security called the Grayscale Bitcoin Trust, or GBTC. This security, issued by DCG subsidiary Grayscale, is “ground zero to explain the failure of many of these institutions in the crypto world,” Ahluwalia noted.
For years, GBTC traded at a premium of up to 50% above its net asset value (NAV), attracting investments from BlockFi, Three Arrows Capital (3AC) and other crypto leaders. For Grayscale, the security was a “cash cow,” Ahluwalia said, generating $800 million in revenue at its peak, with a 65% profit margin.
According to Ahluwalia, DCG took cash flow generated by Grayscale and invested it into GBTC, and also borrowed money from its wholly owned unit, Genesis, to buy even more of the security. 3AC, meanwhile, borrowed nearly $2.4 billion from Genesis, 3AC’s bankruptcy filings state, as it invested in GBTC.
As other investment options linked to bitcoin became available, GBTC flipped to a discount to its NAV. As the discount widened, 3AC couldn’t meet its margin calls. GBTC collapsed in July 2022. Observed Ahluwalia: “GBTC was really the first domino to take down a lot of actors in the ecosystem, more important even than Luna.\”
– DCG’s asset sales will help it survive. The investment conglomerate has said that it owes $575 million to its Genesis crypto-lending subsidiary, and the debt is due in May 2023. To raise the cash, DCG is exploring the sale of assets, including CoinDesk, the online crypto publication, executives have said.
If the asset sales are successful, “I expect DCG to be able to honor their obligations,” Ahluwalia said. In that instance, “I do not expect DCG to go through Chapter 11.”
– Collapses may wind up cleansing crypto. With the collapse of a growing number of crypto firms, the market is “correcting the excess out of the system,” Ahluwalia said. He likens this cleansing process to a \”flushing of bad actors.”
Even so, the Lumida Wealth CEO said he is \”sympathetic\” to public outrage about crypto implosions because companies’ financial health — and their balance sheets — can be very hard for retail investors to understand. \”This is very complicated stuff.”
– If you\’re a crypto investor, learn to recognize the warning signs. In Ahluwalia\’s view, the crypto winter has yielded a few valuable lessons for consumers. Chief among them: “If you see a non-bank pretending to be a bank, be careful,” he said, referring to Celsisus, Voyager Digital, and Genesis.
Second: If a crypto firm issues a token, pay close attention to where the proceeds go, particularly if those funds are earmarked for its own business.
Another question to ask yourself: Is the company heavily reliant on the token to prop up its balance sheet? “That was true for FTX; that was true for Celsius,” he pointed out. “That is a major red flag” for any investor — or should be.\”
Lastly, pay close attention to the management team. “There were quite a few warning signs” of possible mismanagement at FTX and Celsius before they melted down, Ahluwalia notes. At FTX, he says those red flags included the fact that it had no independent board, as the bankruptcy review has since discovered.