Cryptocurrency hedge fund Three Arrows Capital defaulted on Voyager loan

Bitcoin surged to an all-time high of nearly $69,000 at the height of the 2021 crypto frenzy. In 2022, it moved in the opposite direction.

Nurfoto | Getty Images

Well-known cryptocurrency hedge fund Three Arrows Capital has defaulted on a loan of more than $670 million. Brokerage operations with digital assets Voyager Digital issued notice on Monday morningstating that the fund was unable to repay a $350 million loan in a USD-pegged stablecoin, USDCand 15 250 bitcoinworth about $323 million in today’s prices.

The 3AC solvency crisis comes after weeks of turmoil in the cryptocurrency market that devalued hundreds of billions of dollars. Bitcoin and ether both have traded slightly lower over the past 24 hours, albeit well below their all-time highs. Meanwhile, the total market capitalization of cryptocurrencies is about $950 billion, compared to about $3 trillion at its peak in November. 2021

Voyager said it intends to seek damages from 3AC (Three Arrows Capital). Meanwhile, the broker emphasized that the platform continues to operate and fulfill customer orders and withdrawals. This confidence is likely an attempt to contain the fear of contagion through the wider crypto ecosystem.

“We are working diligently and expeditiously to strengthen our balance sheet and explore options so that we can continue to meet customer liquidity needs,” said Voyager CEO Stephen Ehrlich.

As of Friday, Voyager said it has about $137 million and crypto holdings. The company also noted that it has access to a $200 million cash and USDC revolver, as well as a $15,000 bitcoin ($318 million) revolver from Alameda Ventures.

Last weekAlameda (the quantitative trading firm of FTX founder Sam Bankman-Fried) has committed $500 million to fund Voyager Digital, a crypto brokerage. Voyager has already received $75 million from this line of credit.

“The default of 3AC does not result in a default on the Alameda agreement,” the statement said.

CNBC did not immediately receive a comment from 3AC.

How did 3AC get here?

Three Arrows Capital was founded in 2012 by Zhu Su and Kyle Davis.

Zhu is known for his incredibly optimistic view of Bitcoin. He said that last year, the world’s largest cryptocurrency could have been worth $2.5 million per coin. But this May, when the cryptocurrency market started its meltingZhu said on Twitter that his “supercycle price thesis is unfortunately wrong.”

A new so-called “crypto winter” has come. harm projects and companies in the field of digital currency in all directions.

Three Arrow Capital’s troubles appear to have begun earlier this month after Zhu tweeted a rather cryptic message that the company was “in the process of communicating with relevant parties” and “fully committed to resolving this issue.”

There was no further action on specific issues.

But Financial Times reported after the tweet that US crypto lenders BlockFi and Genesis have liquidated some 3AC positions, citing people familiar with the matter. 3AC took out a loan from BlockFi but failed to meet a margin call.

A margin call is a situation in which an investor must allocate more funds to avoid losses on a leveraged trade.

Then the so-called algorithmic stablecoin terraUSD and this sister token moon collapsed.

3AC collided with Luna and suffered losses.

“The Terra-Luna situation took us by surprise,” said 3AC co-founder Davis. Wall Street Journal in an interview earlier this month.

Risk of infection?

Three Arrows Capital is still facing a credit crunch exacerbated by continued pressure on cryptocurrency prices. bitcoin hovered around the $21,000 level on Monday and is down about 53% this year.

Meanwhile, the US Federal Reserve announced further interest rate hikes in an attempt to curb runaway inflation that has knocked steam out of riskier assets.

3AC, one of the largest crypto-focused hedge funds, has borrowed large sums of money from various companies and invested in a number of different digital asset projects. This raised fears of further spread of infection in the industry.

“The issue is that the cost of their [3AC’s] Assets have also declined significantly along with the market, so these are generally not good signs,” Vijay Aiyar, vice president of corporate and international development at crypto exchange Luno, told CNBC.

“It should be investigated if there are any large remaining players who have had contact with them, which could cause further infection.”

Already, a number of crypto firms are facing a liquidity crisis due to the downturn in the market. This month, lending company Celsius, which promised users ultra-high returns for depositing its digital currency, suspended withdrawals for customers, citing “extreme market conditions.”

Another crypto lender, Babel Finance, said this month that it is “facing unusual liquidity pressure” and has put withdrawals on hold.

— Ryan Brown of CNBC contributed to this report.