One of the biggest crypto hedge funds just defaulted on a $670 million loan

Bitcoin hit an all-time high of nearly $69,000 at the peak of the 2021 crypto frenzy. In 2022, it is moving in the opposite direction.

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Prominent crypto hedge fund Three Arrows Capital has defaulted on a loan worth over $670 million. Digital asset brokerage firm Voyager Digital issued a notice on Monday morning saying the fund failed to repay a $350 million loan in the US dollar-pegged stablecoin, USDC, and 15,250 bitcoins, d worth about $323 million at today’s prices.

3AC’s solvency crisis comes after weeks of turmoil in the crypto market, which wiped out hundreds of billions of dollars in value. Both bitcoin and ether are trading slightly lower over the past 24 hours, although far from their all-time highs. Meanwhile, the overall crypto market capitalization sits at around $950 billion, down from around $3 trillion at its peak in November 2021.

Voyager said he intended to pursue the takeover of 3AC (Three Arrows Capital). In the meantime, the broker emphasized that the platform continues to operate and execute client orders and withdrawals. This assurance is likely an attempt to contain the fear of contagion across the broader crypto ecosystem.

“We are working diligently and quickly to strengthen our balance sheet and seek options so that we can continue to meet customer demands for liquidity,” said Stephen Ehrlich, CEO of Voyager.

On Friday, Voyager said it had approximately US$137 million and owned crypto assets. The company also noted that it has access to a $200 million cash and USDC revolver, as well as a 15,000 bitcoin ($318 million) revolver from Alameda Ventures.

Last week, Alameda (the quantitative trading firm of FTX founder Sam Bankman-Fried) committed $500 million in funding to Voyager Digital, a crypto brokerage. Voyager has already drawn $75 million from this line of credit.

“3AC’s default does not result in a default in the agreement with Alameda,” the statement said.

CNBC did not 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 known for his incredibly optimistic view of bitcoin. He said last year that the world’s largest cryptocurrency could be worth $2.5 million per coin. But in May this year, as the crypto market began its meltdown, Zhu tweeted that his “supercycle price thesis was sadly wrong.”

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

Three Arrow Capital’s troubles appeared to begin earlier this month after Zhu tweeted a rather cryptic message stating that the company is “communicating with relevant parties” and is “fully committed to resolving this issue”.

There was no follow-up on specific issues.

But the Financial Times reported after the tweet that US-based crypto lenders BlockFi and Genesis had liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi but was unable to meet the margin call.

A margin call is a situation where an investor must 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 crashed.

3AC was exposed to Luna and suffered casualties.

“The Terra-Luna situation caught us off guard,” 3AC co-founder Davies told The Wall Street Journal in an interview earlier this month.

Risk of contagion?

Three Arrows Capital is still facing a credit crunch exacerbated by continued pressure on cryptocurrency prices. Bitcoin hovered around the $21,000 level on Monday and is down about 53% this year.

Meanwhile, the US Federal Reserve signaled further interest rate hikes in an effort to control runaway inflation, which stifled riskier assets.

3AC, which is one of the largest crypto-focused hedge funds, has borrowed large sums of money from various companies and invested in a number of different digital asset projects. This has raised fears of further contagion in the industry.

“The problem is that the value of their [3AC’s] assets have also declined massively with the market, so overall these are not good signs,” Vijay Ayyar, vice president of business development and international at Luno Exchange, told CNBC.

“What you need to see is if there are any great players left who were exposed to it, which could cause further contagion.”

Already, a number of crypto firms are facing liquidity crises due to the market crash. This month, lending company Celsius, which promised users very high returns for depositing their digital currency, suspended withdrawals for customers, citing “extreme market conditions”.

Another crypto lender, Babel Finance, said this month that it is “facing unusual liquidity pressures” and halted withdrawals.

– CNBC’s Ryan Browne contributed to this report.

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