Voyager Digital - Thought Experiment
How crypto exchanges can make the most of others' misery and save retail users...
Hi All,
I had such a blast writing the last 2 posts that I had to write an encore. I’m currently in NYC for a week (as of this post) so let me know if you want to share ideas.
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The whole Voyager fiasco has taken over my mind over the past week.
I understand that the current plan is to mostly liquidate Voyager’s assets while the company survives… but is there anything else that can be done?
In this blog post, I will run a thought experiment. I’ll take on the position of Head of Corporate Development @ a large crypto exchange, “HODL Exchange”. I am building a thesis for the Voyager opportunity as a potential investment.
To help you set the scene, please read both part 1 and part 2 of my last blogs about Voyager (*wink wink, nudge nudge*) Here’s my angle…
As usual, this is not advice nor the opinions of my employer…
… at best illuminatory and at worse entertaining! Let’s dive in.
Background:
Voyager Digital (Voyager) is a crypto exchange based in NYC
Trading: Voyager is traded on the Toronto Stock Exchange and its market capitalisation is c.$50m, down 98% from its ATH in Nov-21
Business model: Centred on net interest. Customers are paid a fee to deposit cryptocurrencies and Voyager lends these out to institutional investors
NB: Lenders typically use depositors’ assets in other ways to generate higher yields. These are paid back to depositors. Please see part 1 for more colour
Users: 3.5m users and 1.2m funded accounts
Situation: Following their c.$650m loan (15,250 Bitcoins and $350m of $USDC) to 3AC, who subsequently defaulted on the loan, Voyager has a $569m hole on its balance sheet and cannot payout its depositors (retail users)
Current Restructuring plan: My calculations suggest a 69% recovery for depositors
Opportunity:
HODL Exchange joins bankruptcy proceedings and offers to acquire Voyager Digital
The acquisition is three parts:
Part 1: Acquire digital assets and outstanding loans; used to then make depositors whole (all digital assets at current/fair market value)
Part 2: Acquire and immediately sell the underlying Voyager business to a party looking for an easy/stripped-back crypto brokerage platform
Part 3: Full recourse to 100% of the liquidated assets owed by 3AC’s BVI business and other global locations as and where possible if HODL Exchange buys Voyager’s liabilities
Rationale
Part 1 - Acquire Digital Assets and Outstanding loans
Simply, Voyager’s users would be transferred to HODL Exchange’s platform as new users. From there, they can immediately withdraw their money. This is a bet that HODL Exchange has a strong balance sheet that would not result in a bank run (reputation).
More importantly, it’s a marketing opportunity to show that HODL Exchange is strong and puts users’ money first.
This also works as 3.5m users from Voyager are not to be sniffed at! We can assume that 50% of users will leave and the remaining 1.75m users will remain on the HODL platform.
Crucially:
If the run rate costs of customer acquisition for HODL Exchange is < than the consideration for Voyager / # of funded accounts… then this deal makes a lot of sense!
Ultimately, the aforementioned “hole” is not an issue for HODL Echange. as they would cover this (assumes 100% of users do not exit)
Part 2
The underlying Voyager business can immediately be sold to a third party who wants to build its own crypto platform. Voyager’s business assets/expertise + licences obtained globally (Canada, US and Europe) will be valuable.
The profit here would be:
Profit = A - B - C | C = D - E - F
Where:
A = How much HODL Exchange sells the underlying business for (to another exchange)
B = Restructuring and legal costs
C = Internal valuation for the stripped Voyager business
D = Book Value of the assets (fair value)
E = Liabilities to customers
F = Referralfee (an amount to pay for customer information i.e. as a referral)
Hence:
A/C:
I’d value the underlying company using precedent transactions and trading comps (Coinbase + Baakt + Robinhood). Precedent transactions would be both M&A and recent exchange private rounds (with a discount!). Sources for precedent M&A - source 1, source 2 and source 3. I am conscious that a discount may be applied as it’s an acquisition of the team and infrastructure.
B: I’d take a % of digital assets as an estimate. The legal cost could also be charged to and paid out via the payment to Voyager.
D/E: Already covered in part 2. I’d take the valuation of the crypto as of today as the price of cryptos are generally higher than at the bankruptcy filings date
F: Take as a % of the current market rate CAC (customer acquisition cost) for Voyager or HODL Exchange (whichever is lower)
All of that said, this would not be a straightforward process hence HODL Exchange could leave the business behind and let them rebuild it themselves
Part 3
HODL Exchange could also buy all of Voyager’s liabilities @ a discount (69 cents on the dollar). This means that HODL Exchange receives full recourse to the assets being liquidated by 3AC. HODL Exchange could also approach a distressed credit fund to help analyse this opportunity and help drive for a favourable outcome; experienced funds have a unique set of skills after all…
Any recovery here would be used to cover users’ deposits + pocketed as profit
Feasibility
This is no easy investment to take to the investment committee. Reputation + cheaper customer acquisition costs are key drivers. The potential recovery from 3AC and the lifetime value of new customers are material. The sale of the stripped-down Voyager business is a sweetener too (albeit being spicy!) Part 3 is also dependent on a relationship/interest from distressed parties - I’d rate part 3 as a low probability.
Cons
I see 4 main cons for HODL Exchange.
The quality of users could be lower than expected. 97% of Voyager’s users have <$10,000 in deposits. These types of users may not be very profitable over the long run
A lot of Voyager’s customers are US based; some international exchange providers only serve non-US users
Reputational benefits are muted or due to misunderstandings/HODL Exchange is made to look like opportunists on social media. Public perception management is important here
There is no recovery / 3AC liquidations take longer than expected and HODL Exchange are drawn into long-term negotiations that are both expensive and time-consuming
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I was going to end at the above but FTX front ran me! I have been writing this post for a week and since then, FTX had submitted a bid very similar to what I suggested above.
Sources: Press Release + Offer Letter
Highlights:
FTX and Alameda made an unsolicited offer to acquire: (i) Voyager's crypto holdings (ii) its crypto loan positions (less 3AC loans) (iii) the right to not have bankruptcy proceedings trying to clawback aforementioned assets and (iv) all of Voyager’s trademarks and IP. (v) FTX will use part of the purchase price to make early distributions to Voyager’s customers who voluntarily migrate over to FTX
(i/ii) Voyager’s crypto holdings & loans
FTX values the digital assets at fair market value and would pay for them in cash - assuming “today’s price”
Voyager’s users only get a fixed US Dollar claim (paid out in cash) based on the value of digital assets in their wallets on July 5 (the data of Voyager filing). Let’s just say that prices for the assets are higher today…
Voyager will likely keep the loans relationships going and spin up an institutional loan offering
(iii) Preference rights
Basically, creditors can’t come after them following the closing of the deal
(iv) Brand Assets & IP
FTX values the Voyager brand and IP as… zero!
Still, they want to also acquire these brands to avoid customer confusion
They note that they can explore modifying the deal should an external party want to buy the Voyager business (as I predicted above)
(v) Onboarding new users
FTX will onboard Voyager’s users to its platform and enable them to instantly take their cash back (digital assets valued on July 5th) or buy new digital assets on FTX’s platform
FTX will not onboard consumers that are US/Ontario residents (I predict that this is the majority of Voyager customers)
This is more contentious than it seems as how would those remaining customers ever get paid back?
FTX will pay $15m for these customer’s information (I called this earlier, “Referal fee”)
Other Points:
As part of the proposed transaction, Alameda will write off its $75m loan claim. I consider this as payment for preference rights and IP/assets. Notably, FTX does not say that everyone gets paid in full.
Transaction Rationale
FTX is doing this deal to:
Acquire customers for likely less than their own customer acquisition costs
Buy cheap crypto assets - FTX receives the assets at today’s value but users’ deposits are valued as of July 5th, the 1Y low of the ecosystem!
Acquire loans + relationships with institutional counterparties
Would I Take The Offer? - No
If I was Voyager I would not take the offer as it:
Agreed, it enables a quick close to proceedings (imagine how the founding team feels - top of the world to zero) and it would save on litigation costs; lawyers are not cheap
Yes, it also allows Voyager to focus on recovering the loan from 3AC
Voyager can re-incorporate or sell its staff / tech stack to Tradfi/platforms looking to add a crypto offering
HOWEVER
FTX values the underlying business as zero. This would kill any sale of the business as other bidders would do the same…
Voyager may care for the users and van argue that customers must be at least made whole + be paid in crypto rather than the cash offered by FTX
Alameda (FTX’s loan) is structurally subordinate to users’ claims meaning that they would already lose this unless users’ were paid back in full first
At a minimum, I’d be cunning and counteroffer FTX by adding: (i) FTX to receive the digital assets as cash consideration and (ii) the valuation of the digital assets as dated on July 5th. This means that Voyager would pocket the price difference in the period rather than FTX
In other words, if the current price is $100 and the price on July 5th was $80, Voyager sells $100 for cash, gives FTX $80 and keeps $20. In such a deal, FTX would simply get 80% of the digital assets (rather than Voyager causing the crypto market to cash). FTX can then facilitate the liquidation of remaining crypto via their OTC desk for a fee too…
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That’s all folks!
As you can see, there’s an interesting opportunity here. It was great fun to examine this further.
Do let me know if you agree/disagree/ if you would approve this investment as part of HODL Exchange’s investment committee… (in comments, email, or social media)
Thanks for reading!
God Bless.
Joseph
23rd July 2022