Billions of dollars in value have been wiped from the cryptocurrency market in the last few weeks. Companies in the industry feel the pain. Lending and trading companies are facing a liquidity crisis and many companies have announced layoffs.
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Three Arrows Capital, a crypto-focused hedge fund, must meet a deadline Monday to repay more than $670 million in loans or face default in a case that could impact the digital asset market.
3AC, as it is also known, is one of the most well-known crypto hedge funds and is known for its highly leveraged bets.
However, with billions of dollars wiped out of the digital coin market over the past few weeks, the hedge fund faces a potential liquidity and solvency issue.
Voyager Digital, a digital asset brokerage firm, said last week that it loaned 3AC 15,250 bitcoins and $350 million of stablecoin USDC. At Monday’s prices, the total loan is more than $675 million. Voyager gave Three Arrows Capital until June 24 to repay 25 million USDC and the entire outstanding loan by June 27, Monday.
None of those amounts have been returned, Voyager said last week, adding that it could issue a notice of default if 3AC doesn’t return the money.
Voyager said it “intends to advance 3AC’s recovery” and is in discussion with its advisers “about available remedies.”
Voyager Digital and Three Arrows Capital were not immediately available for comment when contacted by CNBC.
Voyager, which is listed on the Toronto Stock Exchange, is down 94% this year.
How did 3AC get here?
Three Arrows Capital was founded in 2012 by Zhu Su and Kyle Davies.
Zhu is known for his incredibly optimistic view of Bitcoin. He said last year that the world’s largest cryptocurrency could be worth $2.5 million per coin. But in May of this year, as the crypto market began its collapse, Zhu said on Twitter that his “Supercycle price thesis was regrettably wrong.”
The start of a new so-called “crypto winter” has hurt digital currency projects and businesses across the board.
Three Arrow Capital’s troubles seemed to start earlier this month after Zhu tweeted a rather cryptic message that the company was “in the process of communicating with relevant parties” and was “fully committed to resolving this.”
What the specific problems were was not followed up.
But the Financial Times reported after the tweet that US-based crypto lenders BlockFi and Genesis were liquidating some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi but failed to meet the margin call.
A margin call is a situation where an investor needs to put in more funds to avoid losing on a trade with borrowed money.
Then the so-called algorithmic stablecoin TerraUSD and its sister token Luna collapsed.
3AC was exposed to Luna and suffered casualties.
“We were very surprised by the Terra Luna situation,” 3AC co-founder Davies said in an interview with The Wall Street Journal earlier this month.
Risk of infection?
Three Arrows Capital is still facing a credit crunch made worse by the ongoing pressure on cryptocurrency prices. Bitcoin hovered around $21,000 on Monday and is down about 53% this year.
Meanwhile, the US Federal Reserve has announced more interest rate hikes in a bid to control rampant inflation, which has been killing riskier assets.
3AC, one of the largest crypto hedge funds, has borrowed large sums of money from various companies and invested in a number of different digital asset projects. That has raised fears of further contagion across the industry.
“The problem is that the value of their [3AC’s] Assets have also fallen massively with the market, so all in all not a good sign,” Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, told CNBC.
“What remains to be seen is whether there are any large, remaining players who have been exposed to them, which could lead to further contagion.”
A number of crypto companies are already facing liquidity crises due to the market collapse. This month, lending firm Celsius, which promised users super-high returns on depositing their digital currency, paused withdrawals for customers, citing “extreme market conditions.”
Another crypto lender, Babel Finance, said this month that it was facing “unusual liquidity pressures” and halted withdrawals.
— CNBC’s Abigail Ng contributed to this report.