Bitcoin market risk: lender accused of ‚reckless speculation

One of the largest lenders on the Bitcoin (BTC) market is under fire. Babel Finance from Hong Kong is said to have been guilty of ‚reckless‘ speculation with USD 4 million in client money.

Risk on the Bitcoin market

Babel Finance, founded in August 2018, is a link between borrowers and lenders. Their clients include mining companies such as F2Pool, NGC and a number of lesser known names.

These minerals lend their Bitcoin to Babel and they receive dollars or Tether USDT in return.

The Loan-to-Value (LTV) ratio, the ratio between the loan and the value of the bitcoin lent, is typically between 50% and 65%.

So if you pledge 1 bitcoin of $11,000, you get a loan of at least $5,500 in return in dollars. Plus they get an interest rate on top of that of 8% to 15%.

But Babel has to get his dollars or USDT from somewhere. They in turn borrow them from Genesis Capital and Tether Inc through the collateral to Bitcoin.

The LTV ratio is 65% more favourable (for Babel) and with a promised return of 6 to 8% for the created Bitcoin.

In other words, Babel’s earnings model is the difference in the LTV ratio. Because they can borrow more money on the market with the same Bitcoin.

And that money is in the derivatives market of futures and options, among other things. Because they have a lot of Bitcoin Sunrise on the balance sheet, they can also take up a fairly leveraged position.

Customers and investors

Outside the mining industry, Babel also serves more well-known customers such as Genesis Capital, Bitgo, Blockchain.com and Bitcoin.com.

At the beginning of March 2020, Dragonfly Capital and Parellel Ventures invested an unknown amount in the company at a company valuation of between $50 and $100 million. They are also working with Neo Global Capital Ventures (NGC), a venture capital firm based in Singapore, which also has a minority stake in the ‚Dutch‘ Deribit.

In March, just before the market crash, co-founder Flex Yang claimed to have provided Coindesk with no less than $380 million in outstanding loans.

Whistleblowers

Ideally, the company and lender should operate cautiously in a volatile market. After all, they are the ones with the Bitcoin under management. But Babel has run this unnecessary risk with customer funds, the (anonymous) criticism is.

According to Decrypt, before and after the market slump of 12 March, known as Black Thursday, too risky trades were set up. They base their story on a number of anonymous sources on social media.

The indictment of the whistleblower(s): Babel has speculated with customer funds without reporting this to these customers.

Both on Twitter and Youtube an audio recording was shared on which Del Wang, the co-founder of Babel, could be heard. Among other things, he said that he had taken a number of very risky positions with customer deposits.

Twitterer Scamstophere, in particular, has a strong appeal against Babel.

It is said to be $4 million in total that has been speculated on, of which $750,000 comes from investor Neo Global Ventures Capital (NGC).

Bitcoin price dip on 12 March

What happened on 12 March? The Bitcoin price plunged to $3,850 in a short time, liquidating many speculators who had opened a long position.

The whistleblower claims that Babel was nearly bankrupt by taking a long position of USD 20 million.

On the leaked tap, CEO Del Wang tells us that Babel used assets of customers and investor NGC as collateral for this long position. The collateral deposited on the Deribit exchange was 4 million dollars, while a call option of 20 million dollars was available. A leverage of ‚5x‘.

Babel increased that position from 3x to 5x by borrowing more from Genesis and Tether at a supposed LTV ratio of 80 to 90%. Because the market actually fell sharply, Babel made a lot of losses.

But after the dip Genesis and Tether demanded their money, because in the meantime Babel’s collateral to them was worth less than the amount borrowed.

Then Tether actually ’saved‘ Babel by agreeing a payment arrangement with Tether. Instead of having to pay out the money in 48 hours, Babel was given one month.

Reporter Wu also claims that BlockFi and OSL temporarily suspended their cooperation with Babel.

Denial

Babel had to pull out all the stops and they launched a number of new products to get more Bitcoin out of the market. With this Bitcoin, they were able to repay the loan to Tether on time.

Babel claims not to recognise the accusations of the whistleblower(s). In a reaction to Decrypt, Flex Yang denies all accusations.

The company has never lost customer funds or we have not been liquidated by lenders. We are cautious compared to the rest of the market. We also have doubts about the authenticity of the audio recordings‘.

A spokesman for Tether denied yet confirmed the story to Decrypt. The fact that a lender is itself a player in the derivatives market is nothing new by the way. However, the market is surprised that Babel continuously expanded its lung position in March.

A customer who wishes to remain anonymous says to Decrypt:

‚The fact that they have managed to get out of this means that they can also get out of another situation‘.