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The News: Crypto hedge fund Three Arrows Capital is insolvent. A British Virgin Islands court ordered the liquidation on Monday to be overseen by Teneo. Read the scoop from Coinbase.
Collateral Damage from Insolvent Crypto Firm Three Arrows Capital— When Will It Stop?
Analyst Take: News of Crypto hedge fund Three Arrows Capital’s insolvency ends one of the biggest and boldest names in crypto. Or does it?
A few years ago, I was visiting a client in New York City. As we stepped out of the elevator in an otherwise nondescript midtown building, my colleague pointed out a rather remarkable sign. There was Lehman Brothers, alive and well almost a decade after declaring bankruptcy.
And Lehman Brothers is still around today – it takes a while to unwind a multibillion firm. If you lend them money, it can take time to get it back even if the courts agree that money is owed. With Lehman, the clock’s still ticking some 14 years later.
Three Arrows Capital is just beginning that journey. Depending on how difficult it is to liquidate the firm’s $10+ billion portfolio, Three Arrows may earn the ignominious award for existing longer in bankruptcy than it did in good standing.
For those who lent to Three Arrows, however, the pain is just beginning.
Three Arrows Capital’s Initial Losses Are Significant But The Full Extent of The Damage Remains To Be Seen
The initial losses for Three Arrows Capital lenders appear to be significant, but the full extent of the damage remains to be seen. Most of the lenders are private companies under no obligation to generally disclose their financial health. But that doesn’t mean their losses are isolated.
Voyager a prime example. The company loaned over $600 million to Three Arrows in a combination of USDC stablecoin and bitcoin. That from a company that did just $102 million in total revenue in the most recent quarter. Both loans are now in default.
Voyager itself now appears to be threatened with insolvency as a result. The company materially reduced the daily withdrawal limit for users from $25,000 to $10,000 and secured a $250 million loan from Alameda, the quantitative trading firm owned by FTX Founder Sam Bankman-Fried.
Leaked details indicate that Voyager’s loan terms are extremely onerous. Nate Anderson of Hindenburg Research has gone so far as to say that Voyager is likely “deeply insolvent.” If it is, I pity the users, and find it unlikely that they will fully recover their funds.
Voyager’s teetering is just the tip of the iceberg. Celsius and BlockFi, both multibillion-dollar crypto lending platforms, also appear to be insolvent. Both have suspended customer withdrawals.
These are just the companies in the headlines. While not all of Three Arrows Capital’s creditors will go bankrupt, it appears likely that many more will at minimum take material losses. We’ll only find out in time how isolated those risks truly are.
It’s unclear if Three Arrows Capital is systemically risky for those in the crypto industry. With many major loan agreements executed over the counter, we won’t find out the full scope of the damage until the liquidators get to business in the coming months. Returning capital will take even longer.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Futurum Research as a whole.
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Image Credit: CoinCU
Jared is an Analyst in Residence at Futurum Research, where he helps guide our practice in all things Web3, the Metaverse, and cryptocurrencies so as to help business leaders understand how they work, why they matter, and how they can not only get involved, but become market leaders along the way.
Jared previously co-founded and served as President and Board Member of Triple Point Liquidity, a blockchain-based fintech startup serving alternative asset managers, their investors, and fund administrators. Prior to Triple Point, he held multiple roles at IBM including leading Digital Assets at IBM Blockchain, leading corporate development for Industry Platforms, and founding Watson Risk & Compliance.
Jared is author and podcast co-host at Fat Tailed Thoughts and serves as a trustee for The Williams School.
Jared holds an AB from Dartmouth College.