Crypto hedge fund Three Arrows fails to meet lender margin calls

Crypto hedge fund Three Arrows fails to meet lender margin calls

Three Arrows Capital was unable to meet demands from lenders for extra funding after digital currency bets deteriorated, throwing the leading crypto hedge fund into a crisis where a credit crunch swept the industry.

The group’s failure to meet margin calls over the past weekend has made it the latest victim of the sharp decline in the prices of many tokens such as bitcoin and ether, which has been fluctuating in the market. Singapore-based Three Arrows is among the largest and most active players in the crypto industry, with investments in lending and trading platforms.

Lenders have sharply tightened the amount of loan offered after the shocks last month. Celsius, a major crypto financial services firm, blocked withdrawals last week, and a pair of major tokens crashed in May.

US-based crypto lender BlockFi was among the groups that liquidated at least some of Three Arrows’ positions, which means the fund mitigates its risks by taking the collateral it has placed to support its borrowing, according to people familiar with the matter.

People said Three Arrows, which made a “strategic” investment in BlockFi in 2020, borrowed bitcoin from the lender but failed to meet a margin call. One person said that the liquidation took place by mutual consent.

“We are in the process of communicating with relevant parties and are fully committed to resolving this,” Su Zhu, co-founder of Three Arrows, said on Twitter Wednesday, without identifying any counterparties. The company did not respond to a request for comment.

Yuri Mushkin, BlockFi’s chief risk officer, said the group can “confirm that we have recently implemented our best business decision with a large client that has not fulfilled its obligations.” . . We believe we are one of the first to take action with this counterparty.”

He added that BlockFi holds collateral that exceeds the size of the loan.

“BlockFi’s prudent and proactive risk management benefits our broader client base and allows us to stay open for business in times of market stress,” Mushkin said. Said.

Troubles at Three Arrows spread to Finblox, a platform that offers 90 percent annual returns for investors to lend their crypto. Finblox, backed by venture capitalist firm Sequoia Capital and receiving funding from Three Arrows, slashed its withdrawal limits by two-thirds London time on Thursday, citing the hedge fund’s situation.

Led by Zhu and co-founder Kyle Davies, Three Arrows is known for its bullish bets on crypto. Zhu has embraced a “super-cycle” crypto view, in which increased mainstream adoption means prices will continue to rise without falling into a short-term bear market.

Last month, he admitted that current sales proved him wrong. “The super-cycle price thesis was sadly wrong, but crypto will still evolve and change the world every day,” Zhu said on Twitter in late May.

“They were really big and really active. “They’ve taken very large positions,” said David Siemer, CEO of digital asset manager Wave Financial. He added that major crypto firms in the space are likely exposed to Three Arrows: “They’ve worked with everybody.”

According to industry sources, the Three Arrows mainly, if not exclusively, managed Zhu and Davies’ own capital. One person who spoke to executives in recent months said they were told the total value of the fund was $4 billion. Blockchain analytics firm Nansen previously estimated the fund’s assets at $10 billion.

Another person working at a crypto trading firm said that they have been unable to reach Three Arrows in recent days. “They don’t answer anyone,” they said.

Three Arrows’ big bets included luna, the sister token of the algorithmic stablecoin terra. Both exploded in May and went to zero, a market-shattering event that turned months of steady declines in crypto prices into an even more dramatic rout.

The fund has stakes in several crypto startups whose tokens have performed poorly in recent months, including Avalanche, Solana, and the Axie Infinity game, all of which have dropped nearly 90 percent since their peak in November.

Three Arrows was also the largest investor in units of the Grayscale bitcoin trust (GBTC), according to FactSet data. GBTC is currently trading at a 30 percent discount to the bitcoin price, as the U.S. Securities and Exchange Commission has so far refused to approve Bitcoin as an exchange-traded fund that would be open to retail investors.

Until the beginning of 2021, GBTC traded at a premium to the bitcoin price. This presented an arbitrage opportunity for funds like Three Arrows, which could borrow Bitcoin, deposit them on Grayscale in exchange for GBTC units, and then sell them at a profit on the open market. Grayscale disallows the use of GBTC for underlying bitcoin.

Three Arrows had approximately 39 million GBTC worth $1.2 billion at the time at the end of 2020, according to its latest report to the SEC in January 2021. Today, the same position would be worth only $550 million.

Grayscale’s CEO, Michael Sonnenshein, said he didn’t know about Three Arrows’ trades, but added: “There are players here who are using a lot of leverage. . . A major correction in prices is sending shock waves through the ecosystem”.

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