Crypto hedge fund Three Arrows fails to meet lender margin calls

Three Arrows Capital did not meet creditors’ demands for additional funds after their digital currency bets deteriorated, prompting the prominent cryptocurrency hedge fund to become a crisis that occurs when a credit crunch takes over the industry. .

The group’s failure to respond to margin calls this past weekend makes the group the latest victim of a sharp drop in the prices of many tokens such as bitcoin and ether that is spreading across 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 greatly strengthened the amount of credit offered after last month’s tremors. Celsius, a major cryptocurrency financial services company, blocked withdrawals last week, while a couple of major tokens collapsed in May.

U.S.-based crypto lender BlockFi was among the groups that liquidated at least some of Three Arrows’ positions, meaning it reduced its exposure by taking guarantees that the fund had put in place to support its loans, according to people familiar with the matter. .

Three Arrows, which made a “strategic” investment in BlockFi in 2020, had borrowed bitcoin from the lender, according to people, but was unable to answer a margin call. One of the people said that the liquidation took place by mutual agreement.

“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 on Wednesday, without specifically 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 exercised our best business judgment recently with a large client who has failed to meet its obligations. We believe we were among the first to take action with this counterparty.” .

He added that BlockFi had a guarantee larger than the size of the loan.

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

Three Arrows ’problems have come to Finblox, a platform that offers merchants 90 percent annualized returns to lend their encryption. Finblox, which is backed by venture capital firm Sequoia Capital and has received an investment from Three Arrows, cut its withdrawal limits by two-thirds in the last hour of Thursday, London time, citing the situation of the hedge fund.

Three Arrows, directed by Zhu and its co-founder Kyle Davies, is known for its crypto bullish bets. Zhu had advocated a “supercycle” view of cryptography, in which the rise in conventional adoption meant that prices would continue to rise without falling back into a bearish market in the short term.

Last month, he acknowledged that the current sale proved him wrong. “Unfortunately, the supercycle price thesis was wrong, but cryptography will still thrive and change the world every day,” Zhu wrote on Twitter in late May.

“They were very big and very active. They took on huge positions,” said David Siemer, chief executive of Wave Financial, a digital asset manager. He added that major space cryptography companies probably had exposure to Three Arrows: “They worked with everyone.”

Three Arrows mainly, if not exclusively, managed Zhu and Davies’ equity, according to industry sources. One person who has spoken to managers in recent months said he was told the total value of the fund was $ 4 million. Blockchain analytics firm Nansen previously estimated the fund’s assets at $ 10 billion.

Another person, who works at a cryptocurrency trading company, said they have been unable to reach Three Arrows in recent days. “They don’t respond to anyone,” they said.

Among the big bets of Three Arrows was luna, the sister tab of the algorithm stablecoin terra. Both imploded in May, reaching zero, an event that shattered the market that turned what had been months of steady declines in cryptocurrency prices into a more dramatic defeat.

The fund has held stakes in a variety of cryptocurrency companies whose tokens have performed poorly in recent months, including Avalanche, Solana and the Axie Infinity game, all of which have fallen by around 90 percent since their November peaks.

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 on the price of bitcoin as the U.S. Securities and Exchange Commission has so far refused to approve it as a publicly traded fund that would be open to retail investors.

Until early 2021, GBTC was trading at a premium with the price of bitcoin. That offered an arbitrage opportunity for funds like Three Arrows, which could borrow bitcoins, deposit it on Grayscale in exchange for GBTC units, which could then be sold with open market profits. The grayscale does not allow GBTC bailouts for the underlying bitcoin.

Three Arrows owned nearly $ 39 million worth of GBTC units by the end of 2020 worth $ 1.2 million, according to its latest report to the SEC in January 2021. The same position today would be valued at just $ 550 million.

Michael Sonnenshein, chief executive of Grayscale, said he was unaware of the Three Arrows exchanges, but added: “There are players here who have used too much influence… A major price correction is sending shockwaves through the ecosystem.”

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