Major crypto hedge fund facing bankruptcy, stinging investors

12 July 2022

Many conservatives and libertarians have been quite bullish on cryptocurrencies, urging their allies to invest in them heavily. But one company that isn’t receiving a lot of endorsements at the moment is Three Arrows Capital (3AC), known for its crypto hedge fund. 3AC, according to CNBC, is on its way to “bankruptcy court.”

“As recently as March, Three Arrows Capital managed about $10 billion in assets, making it one of the most prominent crypto hedge funds in the world,” CNBC’s MacKenzie Sigalos reports in an article published on July 12. “Now, the firm, also known as 3AC, is headed to bankruptcy court after the plunge in cryptocurrency prices and a particularly risky trading strategy combined to wipe out its assets and leave it unable to repay lenders.”

Sigalos adds, “The chain of pain may just be beginning. 3AC had a lengthy list of counterparties, or companies that had their money wrapped up in the firm’s ability to at least stay afloat. With the crypto market down by more than $1 trillion since April, led by the slide in Bitcoin and Ethereum, investors with concentrated bets on firms like 3AC are suffering the consequences.”

Sigalos reports that the cryptocurrency exchange Blockchain.com “reportedly faces a $270 million hit on loans to 3AC” and that the digital asset brokerage Voyager Digital has “filed for Chapter 11 bankruptcy protection” because “3AC couldn’t pay back the roughly $670 million it had borrowed from the company.”

Nic Carter of Castle Island Ventures told CNBC, “Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested. So everyone is withdrawing liquidity from crypto lenders.”

3AC, headquartered in Singapore, was founded by Zhu Su and Kyle Davies in 2012 and has been in business for a decade. And Sigalos notes that the company has enjoyed a “measure of credibility in an industry populated by newbies.”

Nik Bhatia, who teaches finance and business at the University of Southern California (USC), told CNBC that 3AC “was supposed to be the adult in the room” and predicts that there will be more pain in the crypto world.

Sigalos notes, “The stability of UST relied on a complex set of code, with very little hard cash to back up the arrangement, despite the promise that it would keep its value regardless of the volatility in the broader crypto market. Investors were incentivized — on an accompanying lending platform called Anchor — with 20% annual yield on their UST holdings, a rate many analysts said was unsustainable.”

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