Prominent Crypto Fund Defaults on $670M Loan. Now What?

by Marija Matic
By Marija Matic

Crypto has had quite a few challenging weeks, starting with Luna’s collapse in May and continuing onward with low crypto prices and liquidity issues of large funds.

These events have taken a toll on prominent crypto hedge fund Three Arrows Capital.

Today, 3AC defaulted on a loan worth more than $670 million.

This morning, crypto brokerage company Voyager Digital stated that the 3AC fund failed to repay them a loan of $350 million in stablecoin USD Coin (USDC), as well as 15,250 Bitcoin (BTC, Tech/Adoption Grade “A-”), worth about $323 million at today’s prices.

The crypto market reacted to 3AC’s insolvency by going into the red, while Bitcoin broke down below the $21,000 level.

Three Arrows Capital isn’t just any fund — it’s one of the most prominent and active crypto funds around.

From investing billions in equities of crypto businesses and seed sales of tokens, to yield farming and market-making on crypto exchanges, 3AC did it all. It was founded a decade ago and was a winner in the last two rallies.

It’s no wonder that the total crypto market cap reacted to its insolvency by falling below $1 trillion after a weekend spent above. But this was somewhat expected, as 3AC suffered losses in the Luna collapse and subsequently failed to meet the margin calls of large lenders two weeks ago.

The best digital coin exchanges will survive. But it's clear that a cleansing of the weakest is now underway.

Now, there are unknowns and fears when it comes to potential contagion of the wider ecosystem.

First on the line, listed on Toronto Stock Exchange: Voyager itself.

Voyager said that it intends to pursue recovery from 3AC. In the meantime, its broker platform continues to operate and fulfill customer orders and withdrawals.

CEO Stephen Ehrlich said that they’re working diligently and expeditiously to strengthen their balance sheet and pursuing options to continue meeting customer liquidity demands.

As of Friday, Voyager is supposed to have approximately $137 million in addition to crypto assets. The company also noted that it has access to a $518 million revolving credit line from Alameda Ventures, a company founded by crypto exchange FTX’s owner Sam Bankman-Fried, which it received a few days ago.

Voyager’s already pulled $75 million from that line of credit. Now, there’s worry that this situation may cause a default in agreement with Alameda, even though Voyager denounced that.

This is all weighing on Bitcoin …

This weekly chart shows Bitcoin closing two weeks in a row below its 200-day exponential moving average for the first time in history, which is bearish:

Source: TradingView

 

Meanwhile, Ethereum (ETH, Tech/Adoption Grade “A”) is still holding 5% of its weekly gains, even though it’s down 3.2% today.

Other coins, like Uniswap (UNI, Tech/Adoption Grade “B”) and Polygon (MATIC, Tech/Adoption Grade “B-”), are holding their weekly gains even better.

MATIC is down 10% today but has kept a hefty 40% of weekly gains, while UNI is up 30% on a weekly level.

Last week was good for altcoins, but this week is less certain and will depend on how the 3AC situation unfolds.

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What’s next?

After the insolvency of 3AC, it’s left to be seen whether there are any remaining large crypto businesses that had exposure to this fund, which could cause further damage.

What we know is the liquidity crisis has made lending crypto companies up for grabs.

According to CoinDesk, citing a leaked investor call, investment firm Morgan Creek Digital is attempting to raise $250 million from investors to purchase a majority stake in crypto lender BlockFi. Additionally, The Wall Street Journal reported that FTXis rumored to be in talks to acquire a stake in BlockFi.

Banking giant Goldman Sachs is also looking to raise $2 billion from investors to buy distressed assets from crypto lender Celsius Network (CEL, Tech/Adoption Grade “C”). Celsius has faced a liquidity crisis, in the aftermath of Luna’s losses, and may soon file for bankruptcy.

Meanwhile, crypto projects are still raising money. For example, the Unizen exchange, which is part centralized and part decentralized, is raising large sums of up to $200 million, even in this market.

However, a potentially bullish event is right around the corner.

The Grayscale Bitcoin Trust is operationally ready to convert to an exchange-traded fund the moment they are given the appropriate regulatory approvals, according to Michael Sonnenshein, CEO of Grayscale Investments. The deadline for the U.S. Securities and Exchange Commission to approve or reject Grayscale’s application is July 6.

For now, we can only guess what will happen next. Stay tuned to your daily Weiss Crypto Daily issues for updates and more guidance to get you through these times.

Best,

Marija Matić

About the Editor

Marija (pronounced “Maria”) holds a bachelor’s degree in business from the London School of Economics, a master’s in banking from the University of Business Studies of Bosnia and Herzegovina, and is a PhD candidate at the same institution. She specializes in smaller, up-and-coming cryptos.

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