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Billions of dollars of value have been wiped off the cryptocurrency market in the last few weeks. Companies in the industry are feeling the pain. Lending and trading firms are facing a liquidity crisis and many firms have announced layoffs.
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Three Arrows Capital, a crypto-focused hedge fund, has to meet a deadline on Monday to repay more than $670 million in loans or face default, in a case that could have a ripple effect across the digital asset market.
3AC, as it’s also known, is one of the most prominent crypto hedge funds around and is known for its highly leveraged bets.
But with billions of dollars being wiped off the digital coin market in recent weeks, the hedge fund is facing a potential liquidity and solvency issue.
Voyager Digital, a digital asset brokerage, said last week that it had lent 3AC 15,250 bitcoins and $350 million of the stablecoin USDC. At Monday’s prices, the total loan equates to 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.
Neither of these amounts has been repaid, Voyager said last week, adding that it may issue a notice of default if 3AC does not pay the money back.
Voyager said that it “intends to pursue recovery from 3AC” and is talking to its advisors “regarding legal remedies available.”
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, has seen its shares plummet 94% this year.
How did 3AC get here?
Three Arrows Capital was established in 2012 by Zhu Su and Kyle Davies.
Zhu is known for his incredibly bullish view of bitcoin. He said last year the world’s largest cryptocurrency could be worth $2.5 million per coin. But in May this year, as the crypto market began its meltdown, Zhu said on Twitter that his “supercycle price thesis was regrettably wrong.”
The onset of a new so-called “crypto winter” has hurt digital currency projects and companies across the board.
Three Arrow Capital’s problems appeared to begin earlier this month after Zhu tweeted a rather cryptic message that the company is “in the process of communicating with relevant parties” and is “fully committed to working this out.”
There was no follow-up about what the specific issues were.
But the Financial Times reported after the tweet that U.S.-based crypto lenders BlockFi and Genesis liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi but was unable to meet the margin call.
A margin call is a situation in which an investor has to commit more funds to avoid losses on a trade made with borrowed cash.
Then the so-called algorithmic stablecoin terraUSD and its sister token luna collapsed.
3AC had exposure to Luna and suffered losses.
“The Terra-Luna situation caught us very much off guard,” 3AC co-founder Davies told the Wall Street Journal in an interview earlier this month.
Contagion risk?
Three Arrows Capital is still facing a credit crunch exacerbated by the continued pressure on cryptocurrency prices. Bitcoin hovered around the $21,000 level on Monday and is down about 53% this year.
Meanwhile, the U.S. Federal Reserve has signaled further interest rate hikes in a bid to control rampant inflation, which has taken the steam out of riskier assets.
3AC, which is one of the biggest crypto-focused hedge funds, has borrowed large sums of money from various companies and invested across a number of different digital asset projects. That has sparked fears of further contagion across the industry.
“The issue is that the value of their [3AC’s] assets as well has declined massively with the market, so all in all, not good signs,” Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, told CNBC.
“What’s to be seen is whether there are any large, remaining players that had exposure to them, which could cause further contagion.”
Already, a number of crypto firms are facing liquidity crises because of the market slump. This month, lending firm Celsius, which promised users super high yields for depositing their digital currency, paused withdrawals for customers, citing “extreme market conditions.”
Another crypto lender, Babel Finance, said this month that it is “facing unusual liquidity pressures” and halted withdrawals.
— CNBC’s Abigail Ng contributed to this report.
