Three Arrows Capital controlled about $10 billion worth of assets since March, which makes it one of the globe’s most influential virtual currency hedge funds.
The firm, also widely recognized as 3AC, has now filed for bankruptcy after a decrease in crypto values and a risky investment trading strategy coupled to flush out its resources and end up leaving it unable to reimburse lenders.
This sequence of distress may only be getting started. 3AC has a very long list of counterparties or organizations who were depending on the firm’s ability to stay financially solvent. With the cryptocurrency market having fallen more than $1 trillion as of April, led by a drop in Bitcoin and Ether, investors with focused wagers on companies such as 3AC are bearing the brunt of the losses.
Blockchain.com is apparently facing a $270 million drop due to borrowings to 3AC. In the meantime, digital asset broker-dealer Voyager Digital declared bankruptcy safety after 3AC couldn’t repay the firm’s $670 million loan. Losses have also been reported by US-based cryptocurrency lending institutions BlockFi and Genesis, and cryptocurrency derivatives system BitMEX and cryptocurrency exchange FTX.
According to Nic Carter, a specialist at Castle Island Ventures, which concentrates on crypto investment opportunities, credit is being eviscerated and retracted, underwriting requirements are being toughened, and financial condition is being checked, so everyone is withdrawing cash flow from crypto lenders.
Three Arrows’ strategy entailed taking money from all over the sector and then making investments in other, often newly emerging, crypto initiatives. The company had been around for ten years, which gave creators Zhu Su and Kyle Davies some legitimacy in an industry dominated by newcomers. Zhu also co-hosted a renowned cryptocurrency podcast.
According to Nik Bhatia, a business and finance economy professor at the University of Southern California, 3AC was presumed to be the smartest person in the room.
According to court documents obtained by CNBC, attorneys representing 3AC’s lenders contend that Zhu and Davies have yet to begin cooperating with them in any substantial manner. The filing also claims that the liquidation process has not begun, implying that there is no cash to repay the company’s lending institutions.
Requests for comment from Zhu and Davies were not immediately returned.
Three Arrows Capital’s demise can be traced back to the implosion of terraUSD (UST) in May, one of the most prevalent US dollar-pegged stablecoin initiatives.
Despite the claim that it would maintain its financial value regardless of the uncertainty in the wider cryptocurrency industry, the reliability of UST was composed of a complex code, with very little actual currency to support the framework. On an associated lending system known as Anchor, investors were persuaded with a 20 percent annualized rate on their current UST assets, a rate that many experts said was unsupportable.
According to Alkesh Shah, worldwide cryptocurrency and digital asset tactician at Bank of America, the risk investment correction, combined with far less liquidity, has affected initiatives that pledged elevated unsustainably high APRs, culminating in their breakdown.
The Luna and terraUSD collapses are base camp, according to USC’s Bhatia, who authored Layered Money, a publication on digital currencies in 2021. The meltdown, he said, was the first puzzle piece in a long, disturbing sequence of leverage and embezzlement.
Furthermore, the Wall Street Journal reported that 3AC had dedicated $200 million to Luna. According to other industry sources, the fund’s exposure is around $560 million. Whatever the setback, the stablecoin project’s failure deemed that money invested essentially worthless.
The meltdown of UST shook investors’ confidence and sped up the slide in crypto coins that were already ongoing as part of a wider risk-aversion.
In a massive influx of margin calls, 3AC’s lenders requested some of their money back, but the funds were not available. Many of the company’s counterparties, in turn, have been unable to live up to the expectations of their shareholders, including retail investors who had been pledged annualized returns of 20%.
The Bottom Line
The implosion of this prominent hedge fund highlighted just how volatile and risky virtual assets are in comparison to traditional currency. What was thought to be a major player in the game could not even survive the recent onslaught.
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