Three Arrows is Liquidated – Are Other Crypto Hedge Funds In The Trenches?

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Since the beginning of the year, the crypto market has been in the grip of bears. It has had an arduous path back to its winning ways, as it demonstrated in November 2021 when it smashed the $3 trillion total value locked (TVL) record.

Things began to improve again in mid-March, when the most valuable crypto asset, Bitcoin, surpassed the $45k barrier. However, this upbeat song came at an inopportune moment, as the digital financial environment saw another severe collapse.

Its recovery woes were exacerbated by the failure of Terra blockchain, a major decentralized finance (DeFi) system. Terra’s collapse began when its yield-generating pool recommended a variable interest rate on its users’ UST deposits.

Users preferred the savings site because of its consistent 20% return rate. As a result, investor interest declined, and massive UST withdrawals caused the stablecoin to decouple from its dollar peg.

Terra started minting LUNA tokens while at the same time started selling its 40,000 BTC holdings to save the situation. However, this had the unintended consequence of forcing the rising financial environment to return to its pre-2021 lows.

The Jenga Effect

With the curtains drawn, various secret pieces and players are exposed. Celsius Network, a famous cryptocurrency loan platform, was the first. As of March, Celsius, famed for its tagline “Unbank Yourself,” allegedly has $10 billion in assets under management (AUM).

That overall value has now plummeted to new lows. This drop was emphasized when Celsius informed all of its clients that all bitcoin withdrawals were presently on hold. At the time of publication, the platform has yet to restart customer withdrawals.

Celsius had a substantial amount of UST deposits on Anchor Protocol and pulled out $500 million in stablecoin holdings, prompting the UST depeg to become even more prominent after word of the fall began to circulate. As recent events have revealed, the DeFi lender has also suffered a setback on another front.

In exchange for interest payments to its consumers, Celsius risked its users’ Ether assets on the liquid staking site Lido Finance. As the renowned contract network token is supposed to have a 1-to-1 ratio, there should have been some form of incentive in stETH (or staked ETHER) for Celsius and any staker.

stETH, on the other hand, has been selling at a discount, falling 41% in the last month. However, the network token fell by 39% in the same time period.

Three Arrows, 3AC, has faced a similar fate in recent times. Terra’s crypto fund assets, which were formerly valued at $1 billion, have recently been cut to less than $1,000. 3AC’s stETH holdings have also fallen as the bears continue to push the bulls out of the game.

3AC has been undertaking damage control, according to a message by Moonlord, a Twitter user. In order to pay their financial requirements, they have already sold 30k stETH and trimmed their AAVE holdings. Moonlord indicated that the withdrawals will most likely be used to settle their outstanding loans after sharing a bleak graphic from blockchain analytics firm Nansen.

No Light at the End of the Tunnel for Three Arrows

Moonlord indicated that the withdrawals will most likely be used to settle their outstanding loans after sharing a bleak graphic from blockchain analytics firm Nansen.

Are Other Crypto Hedge Funds Affected?

The recent heat waves spreading across the cryptocurrency market have brought to light unseen cracks in the digital financial ecosystem. Companies dealing with cryptocurrency are increasingly reducing their workforce and decreasing costs.

Mike Novogratz, the billionaire founder of Galaxy Digital Holdings, stated that around two-thirds of crypto hedge funds are projected to close because to the extended market slump.

In an interview with CNBC’s Squawk Box, he also indicated that the crypto market is in a long-term capital management phase that might lead to a bottom.