Crypto on a Line of Biggest Weekly Withdrawals from funds

How does a crypto hedge fund collapse?

Three Arrows Capital handled around $10 billion in assets as recently as March, making it one of the world’s most notable crypto hedge funds.

The company, also known as 3AC, is now filing for bankruptcy after a drop in cryptocurrency prices and a particularly dangerous trading technique combined to wipe out its assets and leave it unable to repay lenders.

The chain of pain may only be getting started. 3AC had a long number of counterparties or corporations whose money was riding on the firm’s capacity to stay viable. Since April, the crypto market has lost more than $1 trillion.

Blockchain.com is facing a $270 million hit due to debts to 3AC. Meanwhile, digital asset brokerage Voyager Digital filed for Chapter 11 bankruptcy protection after 3AC was unable to repay the company’s $670 million loans. Losses have also been reported by US-based crypto lenders Genesis and BlockFi, as well as crypto derivatives platform BitMEX and crypto exchange FTX.

Three Arrows Capital’s demise can be linked back to the May collapse of terraUSD (UST), one of the most popular US dollar-pegged stablecoin ventures.

Despite the promise that it would preserve its value regardless of the volatility in the broader crypto market, the stability of UST was based on a sophisticated collection of code, with very little physical currency to back up the arrangement. On an additional lending platform called Anchor, investors were enticed with a 20 per cent annual interest on their UST holdings, a figure that many analysts argued was unsustainable. The risk asset correction, along with less liquidity, has exposed projects that claimed high unsustainable APRs, leading to their failure, such as UST.

The panic selling that accompanied the demise of UST and its sister token luna cost investors $60 billion. The terraUSD and luna collapse is the starting point.

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