a leading hedge fund in default

Three Arrows Capital (3AC), a Singapore-based hedge fund specializing in the cryptocurrency sector, defaulted on two lines of credit totaling $673 million. Its creditor, crypto-asset broker Voyager Digital, informed the market on June 27. 3AC failed to repay a $350 million installment in USDC, a stablecoin, and $323 million in bitcoins at current prices.

loans liquidated due to falling prices

While the contagion is gradually spreading to “web3” players, Voyager wanted to reassure its own clients, specifying that the default of the hedge fund did not put it in difficulty for the moment. The broker indicates that it holds the liquidity necessary for its proper functioning: 137 million dollars in dollars and crypto-assets, and that it has a draw line of 200 million dollars in USDC and dollars, and another 15,000 bitcoins (about $318 million) from Alameda Ventures, which owns about 10% of Voyager.

Founded in 2012, 3AC is one of the largest hedge funds specializing in web3. It has held up to $10 billion in assets under management. 3AC was heavily exposed to the algorithmic stablecoin Terra (Luna), which had its capitalization wiped out, triggering the crisis. 3AC is present in the capital of the main blockchain protocols, has invested in more than twenty companies in the decentralized finance (DeFi) sector, as well as in investment funds and play-to-earn video game players , like Axie Infinity.

He is also present in the capital of BlockFi, a trading and DeFi platform from which he had taken out a loan (a common practice to take advantage of leverage effects). But BlockFi “liquidated” 3AC’s positions, after the fund was unable to meet the margin call to top up its loan coverage (if the cryptocurrency goes down, the principal as collateral must be picked up). Several other platforms have done the same.

overly optimistic hedge funds

The problem, as we can see, is that in this ecosystem the players are all very interconnected. Moreover, decentralized finance and traditional finance are two worlds that are quite sealed off from each other: in short, crypto-finance players will have to save themselves from each other. Hence the risk of an extremely rapid domino effect, knowing that the cryptocurrency market went from 3000 billion to 950 billion dollars between November and June.

According to a study carried out by PwC in the first quarter of 2022, there would be around 300 hedge funds specializing in crypto, and almost 50% of them had exposure to Luna. The consultancy’s poll shows that their executives had no idea what was in store for them: 42% expected bitcoin to be between $75,000 and $100,000, and 35% saw it moving between $50,000 and $75,000 by the end of 2022. Right now it’s around $20,000.

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