Crypto Crash: A First Big Domino Falls. Who’s Next?

Hedge fund Three Arrows Capital (3AC), which bet big on failing crypto Luna and UST, has just fallen into liquidation.

The fears of crypto industry players have just materialized. 

For the first time since the crisis of confidence that plagued the sector following the crash in cryptocurrency prices and the collapse of some tokens — Luna and UST — a big domino has fallen. 

The inevitable has finally happened. 

Indeed, the hedge fund Three Arrows Capital (3AC), based in Singapore, has just gone into liquidation, TheStreet learned on June 29.

A British Virgin Islands court has ordered the hedge fund liquidated and appointed two firms to handle the process, these sources told TheStreet on condition of anonymity. One of the liquidators and the firm specializing in restructuring Teneo

The process is still in its early stages, the sources added. The primary goal of liquidators is to ensure that they protect the assets of the company. A website is expected to be launched soon to accommodate complaints from creditors, the sources added.

Major Impact

This announcement, certainly expected after the firm defaulted on payment deadlines this week, sounded like a thunderclap in the young crypto industry. The prices of cryptocurrencies, most of which belong to ecosystems, were immediately affected. Bitcoin, which had managed to stabilize, was down over 1% in the past 24 hours at $20,067.62, while Ether, the second-largest digital currency by market cap, was down 4.1% at $20,067.62. $1,095.14, according to data firm CoinGecko. 

Most cryptocurrencies linked to decentralized finance (DeFi) protocols – Cardano, Solana, Avalanche, Polkadot -, the big rival of legacy banks, were down sharply.

The 3AC debacle is likely to have significant repercussions on the crypto sector. Firms that have lent money to the hedge fund, including Voyager Digital  (VYGVF) – Get Voyager Digital Ltd Report and fintech BlockFi, could face liquidity problems.

3AC defaulted on a loan worth more than $670 million, after it had $200 million exposure to Luna. Sister tokens Luna and UST, or TerraUSD, of the Terra ecosystem have collapsed, causing the disappearance of at least $55 billion. Basically, 3AC has suffered colossal losses linked to its exposure to Luna and has just missed lender margin calls, meaning it couldn’t come up with what it owed to its lenders.

“The Terra-Luna situation caught us very much off guard,” 3AC co-founder Kyle Davies.

Voyager Digital and the firm BlockFi, which lent large sums of money to 3AC, had to go to the quantitative trading firm Alameda Ventures for a bailout to avoid panic.

Voyager Digital “has accessed US$75 million of the line of credit made available by Alameda and may continue to make use of the Alameda facilities to facilitate customer orders and withdrawals, as needed,” the company said.

Voyager Digital saw its market capitalization drop from $3 billion in November to $106.92 million on June 29.

Will Other Firms File For Bankruptcy?

If it is difficult to speculate on the future of the firm — will it file for bankruptcy? — but one can wonder about the future of its rival Celsius Network. The lender has indeed suspended withdrawals of funds from its platform since June 12. Since then, investors and creditors have had no news. Celsius is currently exploring its options although rumors are more betting on an upcoming bankruptcy filing.

Besides Celsius, there are also other firms, including cryptocurrency exchanges, that are experiencing liquidity difficulties.

“There are some third-tier exchanges that are already secretly insolvent,” billionaire Sam Bankman-Fried told Forbes. Bankman-Fried, who is the CEO of crypto exchange, didn’t give names.

The young entrepreneur recently acquired a 7.6% stake in RobinHood  (HOOD) – Get Robinhood Markets Inc. Report, which is in serious financial difficulty. Rumors surfaced on June 27 that Bankman-Fried could take over the entire brokerage.

But in his interview with Forbes, the young entrepreneur denies any active merger talks with Robinhood.

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Union Capital Financial Group Ltd, registered in the British Virgin Islands, does not provide investment services inside the United States. The company only provides consulting, advisory and educational services.