Sagas such as the collapse of Three Arrows Capital and funds connected, creates extra uncertainty in the market
What happened?
The liquidation of Singapore-based poster boys for the crypto economy Three Arrows Capital is the latest in a string of high-profile companies collapsing in the market, after Terraform Labs and Celsius. In combination they present a pessimistic outlook for the crypto economy.
Founded 10 years ago by former Credit Suisse traders Zhu Su and Kyle Davies, the cryptocurrency hedge fund has since been ordered into liquidation by a court in the British Virgin Islands and reprimanded by Singaporean financial authorities.
The complex funding structure behind Three Arrows was partially exposed when Celsius released more than 1000 documents in court over US$493 million in debts owed by seve large fianancers, the biggest being named in press reports as EquitiesFirst.
Celsius secured cash in exchange for crypto, which they then wanted to reclaim but according to business media EquitiesFirst had sold it in order to act as creditors for Three Arrows Capital, creating a disastrous domino effect.
Writing on the (digital) wall?
Three Arrows’ strategy involved borrowing money from investors familiar with the industry and using that capital in dormant crypto projects. The firm had been around for a decade, which helped give founders Zhu Su and Kyle Davies a measure of credibility in an industry populated by newbies. Zhu also co-hosted a popular podcast on crypto markets.
Indications there were problems at Three Arrows Capital (TAC) began earlier this year, when Zhu tweeted that the company was “in the process of communicating with relevant parties and fully committed to working this out”, without specifying any particular issue.
The firm later confirmed that it had suffered serious losses. The fund had over US$3 billion worth of cryptocurrencies under management, and was investigating options including asset sales and a bailout. They were also under pressure from creditors including BitMex.
According to co-founder Davies, TAC had invested over US$200 million in Luna tokens, and this took a heavy hit when the value of Luna tokens collapsed in May.
Aside from this, the fund was also known for holding a large quantity of Grayscale Bitcoin Trust, as well as staked ether tokens, both of which have seen their values decline sharply.
Zhu had previously argued that the value of cryptocurrencies would continue to rise in his “supercycle” thesis, and the company has become known for its bullish trades and excesses.
Portents for crypto
Digital assets that lie in the blockchain may be subject to the jurisdiction and regulations of various countries.
Creditors seeking back funds may face complicated issues around the valuation of the digital assets they hold. There could be questions around the realistic valuation of securities held by creditors to ascertain specific debts (and in some cases, any under-leveraging).
This is not necessarily a traditional equation, as some could consider the present “crypto winter” to be part of a necessary, correction cycle and that, while the present plunge seems to be brutal, the longer-term stamina of mor robust cryptocurrencies needs to be factored in.
There may be various methods used to fixate on the utility, value, and market attributes around a cryptocurrency.
The economy might see fresh financing being provided with the creation of a new blockchain and minting cryptocurrencies on the new blockchain as a way to diversify value in a restructuring portfolio.
Our take
As always, caution is a necessary factor in deciding whether to invest in digital markets, but there could be a temptation to be overly gloomy.
While this is a sizeable adjustment to a dynamic market that will understandably shake up a sector that is prone to tech volatility, some experts say it is likely to endure and adapt.