After CoinFLEX made headlines with “Bitcoin Jesus” Roger Ver over a dispute over Ver purportedly failing to pay $47 million in margin calls, Wu Blockchain disclosed more details regarding the collapses in its latest blog post.
The beleaguered exchange did not liquidate Roger Ver’s position in time, noted Wu – an indicator of its poor risk management that contributed to the fallout of its whole ecosystem, with digital tokens FLEX and FlexUSD both crashing.
The Making of A Death Spiral
According to a source acquired by Wu Blockchain, CoinFLEX had reportedly made an agreement with Roger Ver before the market collapsed, allowing the high-net-worth client to use his “personal creditworthiness” as a guarantee that his account would not be immediately liquidated even though it had fallen below the maintenance margin. Instead, Ver would have more time to meet the relevant margin requirements.
The trade involved a $47M loss from Ver starting from a long position on CoinFLEX with a margin of BCH, which then sat at $400. However, when the market went south rapidly in the past months, resulting in a liquidity crisis in the exchange, the price of BCH declined to roughly $120. This meant that Ver’s position was far below the maintenance margin.
Given its native token FLEX free falling in value, the exchange decided to use its stablecoin FlexUSD to buy a large amount of FLEX from the secondary market to prop up its prices while opening a short position to hedge the spot price. Nonetheless, the one who lent out all the FLEX tokens for the exchange to sell came from Roger Ver.
Wu’s post explains:
“This meant that if Roger Ver defaulted on his margin, CoinFLEX’s position would not be profitable and would then be equivalent to a net long position in a large amount of FLEX spot. So, when the withdrawal restriction announcement was made, CoinFLEX’s total funds began to fall in a cyclical fashion.”
Under this circumstance, the FlexUSD price trading at less than $0.30 today is in a death spiral.
Considering that Ver provided liquidity for CoinFLEX to short its token as no one, at that circumstance, would have wanted to be the exchange’s counterparty, Roger Ver, by Wu’s estimates, was responsible for around $90M out of CoinFLEX’s total loss of $120 million. It consists of losses from the de-peg of the stablecoin and the collapse of the SmartBCH cross-chain bridge.
Wu’s source also revealed that the BCH proponent had admitted to default margin payments but did not “have enough cash flow on hand to consider using shares (of companies like Blockchain.com or Kraken) as collateral in lieu of margin.” Later, CoinFLEX CEO Mark Lamb took the matter online when two parties were negotiating, accusing Bitcoin Jesus of defaulting on $47M debt.
The root cause of this debacle stems from not only Roger Ver’s default but also CoinFLEX’s poor risk management, Wu concluded, at the expense of users on CoinFLEX and SmartBCH. Regarding the exchange’s prospect, Wu said, it could “gradually make up the shortfall with the revenue from trading fees alone” due to its profitability, even though Roger Ver is unable to repay its debts, added Wu.