In a recent interview, the co-founder of the world’s largest crypto hedge fund, Three Arrows Capital, said they are begging for a bailout due to the Luna crash.
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Three Arrows Capital Ltd., a cryptocurrency-focused hedge fund, has hired legal and financial experts to help find a solution for its investors and lenders after incurring significant losses as a result of a broad market selloff in digital assets, the firm’s founders announced on Friday.
In an interview, Kyle Davies, co-founder of Three Arrows, said, “We have always been believers in crypto and we still are.” “We are committed to working things out and finding an equitable solution for all our constituents.”
In April of this year, the nearly ten-year-old hedge fund, which was founded by former classmates and Wall Street currency traders Su Zhu and Mr. Davies, had around $3 billion in assets under management.
That was just a few weeks before the value of TerraUSD, an algorithmic stablecoin, and its sister cryptocurrency, Luna, plummeted in mid-May.
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Asset sales and a rescue by another firm are among the options being considered by Three Arrows, according to Mr. Davies. The fund is seeking to negotiate an arrangement with creditors that will provide it additional time to devise a strategy. The company is still open for business as it looks for a solution.
Three Arrows was one of a handful of significant investors who participated in Luna Foundation Guard’s $1 billion token sale earlier this year, a nonprofit corporation founded by Do Kwon, the creator of TerraUSD. The money were used to create a bitcoin-denominated reserve for TerraUSD, with the goal of keeping the stablecoin’s value at $1 per coin.
Mr. Davies claimed that as part of the arrangement, Three Arrows invested around $200 million in Luna, an amount that was virtually wiped out when TerraUSD and Luna both became worthless in a matter of days.
He went on to say that the two cryptocurrencies were formerly among the top ten most valuable digital coins before losing a total of $60 billion in market capitalization last month. A few people in the crypto sector have expressed worries about TerraUSD’s stability and its reliance on traders to function as its backup prior to the collapse, claiming that this mechanism may lead to a downward cycle.
“The Terra-Luna situation caught us very much off guard,” Mr. Davies said, adding that the big selloff was unprecedented. The Luna Foundation’s sale of bitcoin to support TerraUSD worsened bitcoin’s value falls in May.
Mr. Davies said Three Arrows was able to weather the Luna losses, but the subsequent chain of events that saw bitcoin, ether, and other cryptocurrencies collapse in recent weeks posed new issues.
As the value of digital assets has declined across the board, credit conditions have tightened significantly, prompting some lenders to demand partial or full repayment on loans granted to crypto investors earlier. Rapidly rising interest rates in the United States, as a result of the Federal Reserve’s efforts to contain high inflation, have worsened a selloff in risky assets.
According to data provider CoinMarketCap, crypto’s overall market capitalization has fallen to $910 billion on Friday, from nearly $3 trillion in November last year. Celsius Network LLC, a popular cryptocurrency lender, abruptly halted customer withdrawals, swaps, and account transfers this weekend, citing “extreme market conditions.”
“We were not the first to get hit…This has been all part of the same contagion that has affected many other firms,” Mr. Davies said.
Three Arrows is still calculating its losses and valuing its illiquid assets, which include venture capital investments in dozens of private cryptocurrency-related businesses and startups, according to him.
Mr. Zhu, the other founder of Three Arrows, stated, “We are the biggest investors in the fund, and our intent was always for everyone to do well in it.”
Mr. Zhu projected that bitcoin will enter a growth supercycle in early 2021, with prices continuing to rise as the cryptocurrency received more mainstream use. He tweeted in late May, when the market was selling off, that the “Supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day.”
Three Arrows’ unexpected decline reflects the company’s prior solid performance record. With just $1.2 million, Messrs. Zhu and Davies launched their fund in late 2012. It began by trading emerging market currencies before substantially investing in cryptocurrencies in recent years, boosting the fund’s holdings as bitcoin and other digital assets rose in value.
The firm is known to have held significant investments in the Grayscale bitcoin Trust and “Lido staked ether” tokens, both of which have lately lost value. The latter is a derivative of the cryptocurrency ether, which is now held in reserve until the Ethereum network switches to a less energy-intensive model. These tokens have recently been trading at a lower price than ether.
All of the fund’s investors are institutions or wealthy individuals, according to Nichol Yeo, a partner at law firm Solitaire LLP who is advising Three Arrows. He went on to say that the company is keeping Singapore’s financial regulator, the Monetary Authority of Singapore, up to date on its recent activities.
Three Arrows announced intentions to relocate its headquarters to Dubai, where the digital-asset market is flourishing, just before the last downturn. The firm was a regulated fund manager in Singapore until last year, when it relocated to the British Virgin Islands as part of a relocation strategy.