Last Wednesday, executives at Voyager Digital, a crypto lender, said the firm would pursue Three Arrows Capital (a Dubai-based hedge fund specializing in crypto investments) for failure to repay $650 million in loans.
Voyager shares — which are listed on the Toronto Stock Exchange — plummeted 43%.
Sadly, there’s plenty more of this sort of thing coming as the weaker players get shaken out.
The traditional markets are taking it on the chin, too as traders worry about the Federal Reserve, short-term interest rates and commodity prices.
Any one of these issues is capable of undermining confidence in risk assets. However, traders are looking past the mainstreaming of crypto assets, to their peril.
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This sort of thing happens every cycle. Some smart people on Wall Street build financial products that are supposed to consider intermarket relationships.
When one asset goes up, another declines. This great arbitrage is fine in good markets. In bad investment climates, everything gets pear-shaped quite quickly. The relationships evaporate. All asset classes decline at the same time.
It’s not hard to see that some traditional asset relationships are deteriorating.
I’m old enough to remember when gold was a hedge against inflation, yet the yellow metal is plummeting even as annualized inflation hits 40-year highs.
And last week, gold joined stocks, as measured by the S&P 500, bonds, energy and Bitcoin (BTC) in a watershed decline. The only asset investors sought in the eye of the storm was the U.S. dollar.
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Crypto and greenbacks are at the root of the Voyager Digital debacle.
Voyager had been offering its clients yields of up to 12%, and in exchange, the right to hold their digital coins on its platform.
The firm, based in Jersey City, New Jersey, then lent those assets to third parties in exchange for fees. The difference between the interest paid to customers and the fees collected was profit, at least in theory.
A Voyager statement released last week indicated that its exposure to 3AC s is 15,250 Bitcoin, and $350 million in USDC, an Ethereum (ETH)-based stablecoin pegged to the U.S. Dollar. At current prices, that is $650 million.
Three Arrows Capital is a Dubai-based hedge fund that specializes in crypto investments.
On June 17, executives said that the firm hired legal counsel and financial advisors in the wake of heavy losses that were incurred during the recent crypto meltdown, according to a report in The Wall Street Journal. 3AC is believed to have lost $400 million.
The risk to the stock market is very similar, and it’s why I suggest investors …
Let the Market Keep Settling
Three Arrows Capital is likely one of many hedge funds and financial institutions caught in the wake of the crypto collapse.
In the days and weeks ahead, other firms are likely to surface. It is the nature of Wall Street and financial product development. When markets blow up, arbitrage fails.
In fairness to Voyager, the firm did announce two weeks ago that it secured a loan from Alameda Ventures for $200 million in cash and USDC, plus a 15,000 Bitcoin revolving line of credit. These funds are supposed to secure customer assets against current volatility.
I’ve been extremely careful this year with all tech investments. While I’m committed to the longer-term digital transformation tailwind, investor money isn’t going to flow back into tech shares until there is some clarity on where all of the crypto bodies are buried.
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Best wishes,
Jon D. Markman
