Crypto hedge fund collapses after defaulting on $674m loan

·3 min read
cryptocurrency crypto market three arrows capital
cryptocurrency crypto market three arrows capital

A cryptocurrency hedge fund set up by two former investment bankers has collapsed owing more than half a billion dollars.

Three Arrows Capital entered liquidation on Wednesday after a British Virgin Islands court ruled in favour of creditors seeking repayment of debts.

Shortly before its demise, the hedge fund had defaulted on a $674m loan, triggering creditors to seek its liquidation.

Blockchain analysis business Nansen estimated that Three Arrows had the equivalent of $10bn under management, though the valuation of cryptocurrencies in real-world money tends to be much more volatile than for other asset classes.

Two partners from US consulting firm Teneo have been appointed by the BVI court to handle the insolvency, Bloomberg reported. A website will be set up for creditors to register their claims, with a source telling the newswire that a sale of Three Arrows’ remaining assets is possible.

Three Arrows did not respond to requests for comment. Teneo declined to comment.

Three Arrow’s demise marks one of the biggest corporate collapses so far during what commentators have dubbed “crypto winter”: a months-long decline in the cryptocurrencies prices. Almost $2 trillion has been wiped off the market’s value since its peak last November.

Prices have stabilised somewhat in recent weeks but Bitcoin, the world’s biggest cryptocurrency, dropped back below $20,000 today. At its peak, each token was worth more than $68,000.

Three Arrows was set up in 2012 by former Deutsche Bank trader Su Zhu and Kyle Davies, a one-time derivatives trader for Credit Suisse.

Its collapse has implications for other cryptocurrency traders, as the fund had large investments in digital tokens including Bitcoin and Ethereum, which may now be sold.

One of the hedge fund’s biggest lenders, Toronto-listed cryptocurrency trading company Voyager Digital, publicly issued a notice of default to Three Arrows on Monday saying the fund had failed to make required payments on a digital token loan.

Stephen Ehrlich, chief executive officer of Voyager, said: “We are working diligently and expeditiously to strengthen our balance sheet and pursuing options so we can continue to meet customer liquidity demands.”

The loan in question was made up of $350m in US Dollar Coin, a cryptocurrency whose value is pegged to the dollar, and 15,250 Bitcoins.

Shares in Voyager have fallen more than 90pc since the start of the year.

Bitcoin’s value has crashed 70pc since its all-time high in November last year, bringing the broader cryptocurrency market down with it. The slump has coincided with rising interest rates around the world, which have sucked liquidity out of more speculative investments.

Investors have been spooked by a series of high-profile failures, including the Luna digital token, which was reportedly one of Three Arrows’ larger investments.

Luna was a cryptocurrency that underpinned TerraUSD, a token meant to be pegged to the value of the US dollar. Terra briefly unpegged from the dollar in May after Luna abruptly crashed in value, dragging the stablecoin down with it.

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