In January Cantor Fitzgerald LP launched a $200 million special purpose acquisition company (SPAC), Cantor Equity Partners 1, targeting the crypto sector. Now it will likely receive a $3 billion investment in bitcoin from Tether, Tether affiliate Bitfinex, and SoftBank, the Financial Times first reported. The SPAC CEO and Chairman is Brandon Lutnick, the 27-year-old son of US Commerce Secretary Howard Lutnick. The younger Lutnick is also currently the chair of Cantor Fitzgerald LP.
Half of the bitcoin will come from Tether, with SoftBank contributing $900 million and Bitfinex $600 million.
The goal of the vehicle is to mimic the success of MicroStrategy (now renamed as Strategy). It owns $50 billion worth of bitcoin but has a significant net asset value premium, so the company’s market capitalization is $88.5 billion. MetaPlanet in Japan has copied the strategy with some success, and GameStop also recently bought bitcoin.
It raises capital to invest in further bitcoin acquisitions. Until recently it was issuing 8% convertible bonds which would appeal to convertible bond arbitrageurs. In January it announced plans for a massive preferred stock issuance with a 10% coupon. Cantor Fitzgerald & Co is one of nine bookrunners for the issuance.
Strategy’s CEO Michael Saylor attracts both fans and scorn. Some in the crypto sector worry that he is building a house of cards. That’s especially because of the high coupon rates offered on the bonds and preferred stock, whereas bitcoin doesn’t generate any cash flow. This creates the need to raise more capital to pay interest. However, the small print of the preferred stock offering gives the company limited leeway to defer dividends while it raises cash.
The Cantor lending opportunity
This is likely where the Cantor venture sees an opportunity. Cantor Fitzgerald & Co (CF&Co) had already announced plans to get into the crypto lending business to the tune of $2 billion. So it can potentially use the income generated to pay coupons on convertible debt.
Hypothetically, the SPAC could lend to CF&Co, which can lend the bitcoin to traders.
Cantor has been eyeing a gap in institutional crypto lending. A recent report by Galaxy Digital showed that Tether has a 73% market share in centralized crypto lending, followed by Galaxy and Ledn.
So why does Tether need Cantor?
As the appetite for crypto expands towards the traditional end of the market, Cantor should be able to open new doors. DeFi lending used to be a minor player, but now makes up 63%. However, DeFi collateralization requirements are higher, which is one of the reasons DeFi lending was relatively unaffected by the Terra collapse.
The collapse of the Terra stablecoin took down the Three Arrows Capital hedge fund, which impacted most of the major centralized lenders, resulting in the eventual demise of BlockFi, Celsius, Genesis Global Capital and Voyager.
Meanwhile, there are two diametrically opposed views on bitcoin lending. Many bitcoin maximalists see the finite supply of bitcoin as crucial. Lending or re-hypothecating bitcoin expands the supply. From a traditional finance perspective, bitcoin may be an appreciating asset, but it doesn’t earn any cash flow. Lending changes this.
Changing tack, we wondered whether Cantor Equity Partners 1 would be required to enter into a business combination, given it’s an acquisition vehicle. It turns out that the small print refers to acquisitions in the broadest terms, including asset acquisitions, which could include bitcoin.
