With more than 19,000 virtual currencies available, the digital currency industry has compared the current market situation to the early years of the internet. industry players say however that most of these coins will collapse.
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In March, Three Arrows Capital managed $ 10 billion in assets, becoming one of the most popular crypto hedge funds in the world.
Now the firm, also known as 3AC, is headed to bankruptcy court after a plunge in cryptocurrency prices and particularly risky trading strategies combined to wipe out assets and leave it impossible to repay creditors.
The pain chain may have begun. 3AC has a long list of partners, or companies that have money wrapped up in the company’s ability to at least stay. With the crypto market down more than $ 1 trillion since April, led by a slide in bitcoin and ethereuminvestors with concentrated bets on companies like 3AC suffer from it.
Exchange Crypto Blockchain.com reportedly faced a $ 270 million hit in loans to 3AC. Meanwhile, digital asset broker Voyager Digital filed for Chapter 11 bankruptcy protection after 3AC could not repay about $ 670 million of it has borrowed from the company. US -based crypto lender Genesis and BlockFi, crypto derivative platforms BitMEX and FTX crypto exchanges also suffered losses.
“Credit is damaged and withdrawn, underwriting standards are tightened, solvency is tested, so everyone withdraws liquidity from crypto lenders,” said Nic Carter, a partner at Castle Island Ventureswhich focuses on blockchain investment.
The Three Arrows strategy involves borrowing money from all industries and then converting and investing that capital in other crypto projects, often nascent. The company has been around for a decade, which has helped give founders Zhu Su and Kyle Davies credibility in the industry where the start -ups live. Zhu is also a popular host podcast in crypto.
“3AC is supposed to be an adult in the room,” said Nik Bhatia, professor of finance and business economics at the University of Southern California.
Court documents reviewed by CNBC show that attorneys representing 3AC’s creditors claimed that Zhu and Davies had not yet begun working with him “in a meaningful way.” The filing also said that the liquidation process has not yet begun, meaning there is no cash to pay off the company’s debts.
Zhu and Davies did not immediately respond to requests for comment.
Search for the falling dominoes
The decline of Three Arrows Capital can be traced to the May collapse of terraUSD (UST), which has become one of the most popular stablecoin projects in the US dollar.
The stability of UST depends on a complex set of codes, with very little money to back up these arrangements, although it promises to keep its value regardless of volatility in the broader crypto market. Investors are given an incentive – on a lending platform called Anchor – with an annual return of 20% on UST’s ownership, the level many analysts say is unsustainable.
“The correction of risky assets coupled with low liquidity has opened up projects that promise unsustainable APRs, leading to collapses, such as UST,” said Alkesh Shah, a global digital and crypto asset strategist at Bank of America.
The panic sale associated with the collapse of UST, and its sister token luna, cost investors $ 60 billion.
“TerraUSD and luna fell to zero,” said Bhatia of USC, which published last year’s book on digital currency titled “Layered Money.” He described the crisis as the first domino to fall into a “long and dreamy chain of influence and deception”.
3AC told the Wall Street Journal it has invested $ 200 million in luna. Other industry reports said the fund’s exposure is around $ 560 millions. Whatever the losses, the investment is almost useless during the stablecoin project fail.
The UST implosion rocked confidence in the sector and accelerated the slide in cryptocurrencies has taken place as part of a broader pullback of risk.
3AC lenders get some money back during a flood of margin calls, but the money isn’t there. Many of the company’s partners, however, could not meet the demands of investors, including retail holders who were promised annual returns of 20%.
“Not only does it not hinder anything, but it also diverts billions of creditors’ funds, ”Bhatia said.
Peter Smith, CEO of Blockchain.com said last week, in a letter to shareholders reviewed by CoinDesk, if the company’s exchanges “remain liquid, solvents and customers will not be affected.” But investors have heard similar sentiment before – Voyager said the same thing the day before filing for bankruptcy.
Bhatia said the cascade is suitable for any player in the market with significant exposure to impaired assets and liquidity. And crypto comes with some consumer protections that retail investors don’t know what, if any, they will have.
Voyager Digital customers recently received an email indicating that it will be a long time before they can access the crypto contained in their accounts. CEO Stephen Ehrlich said on Twitter if after a company goes through the bankruptcy process, customers with crypto in their accounts will potentially receive a sort of pickup bag.
This may include a combination of held crypto, a public stake in a reorganized Voyager, Voyager tokens and anything else that can be obtained from 3AC. Investor Voyager told CNBC that he did not know why he was optimistic.
WATCH: Voyager Digital files for bankruptcy amid crypto creditor solvency crisis
