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Three Arrows Capital crypto hedge fund defaults on Voyager loan

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Bitcoin rallied to a record high of nearly $69,000 at the peak of the 2021 crypto frenzy. In 2022, it’s moved in the wrong way.

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Distinguished crypto hedge fund Three Arrows Capital has defaulted on a loan price greater than $670 million. Digital asset brokerage Voyager Digital issued a notice on Monday morning, stating that the fund didn’t repay a loan of $350 million within the U.S. dollar-pegged stablecoin, USDC, and 15,250 bitcoin, price about $323 million at today’s prices.

3AC’s solvency crunch comes after weeks of turmoil within the crypto market, which has erased a whole lot of billions of dollars in value. Bitcoin and ether are each trading barely lower within the last 24 hours, though well off their all-time highs. Meanwhile, the general crypto market cap sits at about $950 billion, down from around $3 trillion at its peak in Nov. 2021.

Voyager said it intends to pursue recovery from 3AC (Three Arrows Capital). Within the interim, the broker emphasized that the platform continues to operate and fulfill customer orders and withdrawals. That assurance is probably going an try and contain fear of contagion through the broader crypto ecosystem.

“We’re working diligently and expeditiously to strengthen our balance sheet and pursuing options so we will proceed to satisfy customer liquidity demands,” said Voyager CEO Stephen Ehrlich.

As of Friday, Voyager said it had roughly $137 million in U.S. dollars and owned crypto assets. The corporate also noted that it has access to a $200 million money and USDC revolver, in addition to a 15,000 bitcoin ($318 million) revolver from Alameda Ventures.

Last week, Alameda (FTX founder Sam Bankman-Fried’s quantitative trading firm) committed $500 million in financing to Voyager Digital, a crypto brokerage. Voyager has already pulled $75 million from that line of credit.

“The default of 3AC doesn’t cause a default within the agreement with Alameda,” the statement said.

CNBC didn’t immediately receive a comment from 3AC.

How did 3AC get here?

Three Arrows Capital was established in 2012 by Zhu Su and Kyle Davies.

Zhu is thought for his incredibly bullish view of bitcoin. He said last yr the world’s largest cryptocurrency could possibly be price $2.5 million per coin. But in May this yr, because the crypto market began its meltdown, Zhu said on Twitter that his “supercycle price thesis was regrettably improper.”

The onset of a recent so-called “crypto winter” has hurt digital currency projects and firms across the board.

Three Arrow Capital’s problems appeared to start earlier this month after Zhu tweeted a reasonably cryptic message that the corporate is “within the means of communicating with relevant parties” and is “fully committed to working this out.”

There was no follow-up about what the precise issues were.

However the Financial Times reported after the tweet that U.S.-based crypto lenders BlockFi and Genesis liquidated a few of 3AC’s positions, citing people acquainted with the matter. 3AC had borrowed from BlockFi but was unable to satisfy the margin call.

A margin call is a situation wherein an investor has to commit more funds to avoid losses on a trade made with borrowed money.

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 continues to be facing a credit crunch exacerbated by the continued pressure on cryptocurrency prices. Bitcoin hovered across the $21,000 level on Monday and is down about 53% this yr.

Meanwhile, the U.S. Federal Reserve has signaled further rate of interest hikes in a bid to regulate rampant inflation, which has taken the steam out of riskier assets.

3AC, which is one among the largest crypto-focused hedge funds, has borrowed large sums of cash from various corporations and invested across plenty of different digital asset projects. That has sparked fears of further contagion across the industry.

“The problem is that the worth of their [3AC’s] assets as well has declined massively with the market, so all in all, not good signs,” Vijay Ayyar, vp of corporate development and international at crypto exchange Luno, told CNBC.

“What’s to be seen is whether or not there are any large, remaining players that had exposure to them, which could cause further contagion.”

Already, plenty of crypto firms are facing liquidity crises due to market slump. This month, lending firm Celsius, which promised users super high yields for depositing their digital currency, paused withdrawals for patrons, citing “extreme market conditions.”

One other crypto lender, Babel Finance, said this month that it’s “facing unusual liquidity pressures” and halted withdrawals.

— CNBC’s Ryan Browne contributed to this report.

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