Three Arrows at Risk – Which Crypto Hedge Fund Will Fail?

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The crypto market has been in the grasp of the bears since the beginning of the year. It has endured a hard run back to the winning ways previously depicted in November 2021, when it touched the $3 trillion total value locked (TVL) mark.

Things began to look up once more in mid-March when the foremost crypto asset, Bitcoin, touched the $45k mark. But this joyous song was ill-timed as the digital financial landscape saw a sharp decline once again. Its recovery pangs were further aggravated by the collapse of the popular decentralised finance (DeFi) protocol, Terra blockchain. Terra began its decline when its yield-generating pool proposed a variable interest rate for its users’ UST deposits.

Users favoured the savings platform due to its stable 20% interest. As a result, investor interest dropped, and large UST withdrawals led to an uncoupling of the stablecoin to its dollar peg. To salvage the situation, Terra began minting LUNA tokens while simultaneously offloading their 40,000 BTC holdings. However, this had a counter-intuitive result as the BTC price dip forced the emerging financial landscape to suffer its pre-2021 lows again.

House of Cards Falling Down?

With the curtains down, several hidden pieces and players have been made bare. The first was the popular crypto lending platform, Celsius Network. Celsius, known for its slogan ‘Unbank Yourself’, reportedly had $10 billion in assets under management (AUM) as of March.

Now, that total value has dropped to new levels. This decline was highlighted when Celsius sent out an email to all of its customers informing them that all cryptocurrency withdrawals were currently on hold. At press time, the platform is yet to resume withdrawals for customers.

As events have shown, Celsius had a sizable amount of UST deposits on Anchor Protocol and withdrew their stablecoin holdings worth $500 million, forcing the UST depeg to become even more prominent once news of the decline started circulating. As recent events reveal, the DeFi lender has also lost on another front.

Celsius staked or pledged its users’ Ether holdings on the liquid staking platform, Lido Finance, in return for interests which are redistributed to its customers. There should have been a reward with stETH (or staked ETHER) for Celsius, and any staker, which is supposed to hold a 1-to-1 ratio with the popular smart contract network token. However, stETH has been trading at a discount, dropping 41% in the past month. Meanwhile, the network token dropped by 39% in the same timeframe.

In recent weeks, Three Arrows, 3AC, has suffered a similar fate. The crypto fund holdings in Terra, formerly worth $1 billion, have since been reduced to less than $1,000. 3AC has also seen its stETH holdings slip, as the bears continue to squeeze the bulls out of the fray.

According to a tweet by Moonlord, a Twitter user, 3AC has been doing damage control. They have already dumped 30k stETH and streamlined their AAVE positions in a bid to meet their debt obligations. Sharing a dismal chart from blockchain analytics company, Nansen, Moonlord stated that the withdrawals would likely be used to cover their outstanding loans.

Another Twitter user, OnchainWizard, has corroborated the dire straits 3AC has found itself. The user pointed out that a dip of 11% in the ETH price, to $1,042, could see 3AC slip to an 85% liquidation threshold.

More Troubles for 3AC

With insolvency on the horizon, 3AC is finding itself between a rock and a hard place. To further exacerbate the whole trial, the co-founder of 8Block, Danny Yuan recently posted a lengthy Twitter thread, categorically accusing the crypto hedge fund of misappropriating the exchange’s funds in their custody. The sum in contention is $1 million, which was taken out of their accounts without their consent.

Who Else is Feeling The Heat?

The current heat waves sweeping through the crypto market have brought to the fore hidden crevices in the digital financial landscape. Crypto-facing companies are rapidly downsizing their employee numbers and cutting expenses.

The billionaire founder of Galaxy Digital Holdings, Mike Novogratz, noted that about two-thirds of crypto hedge funds are expected to shut down following the prolonged market downturn.

He also stated in an interview with CNBC’s Squawk Box that the crypto market is in a long-term capital management moment which could see it hit bottom.

The stakes are high as more assets shed gains. Which crypto hedge funds will come unhanded in the next couple of weeks?

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