Crypto hedge fund Three Arrows Capital in default on $665M loan

The crypto broker Voyager Digital issued a notice of default Monday to the hedge fund Three Arrows Capital for failing to make the required payments on a loan worth more than $665 million, the latest sign of financial turmoil that has rocked the world of cryptocurrencies as the value of tokens has plummeted.

Voyager said it intends to recover the funds, which were loaned as 15,250 bitcoin and $350 million in the stablecoin USDC, a digital token whose value is pegged to the dollar.

“We are working diligently and expeditiously to strengthen our balance sheet and pursuing options so we can continue to meet customer liquidity demands,” said Voyager chief executive Stephen Ehrlich.

The company said it is in discussions with advisers to review legal remedies.

Three Arrows Capital did not immediately respond to a request for comment.

The loan default comes at a perilous moment for cryptocurrencies, as industry players and investors brace for a “crypto winter” after a crash in prices and abrupt layoffs, and amid a renewed and emboldened sense of skepticism that has boiled over to condemnation among critics and market observers. The industry’s high level of interconnectedness has also flashed warning signs. Many companies borrow from and invest in each other, and the risks to investors are amplified because failure at one institution could cascade into others.

Across the industry, investors have endured staggering losses. Bitcoin, the most prominent cryptocurrency, was trading Monday around $20,700, far below its November peak of roughly $69,000. Meanwhile, the market value for all cryptocurrencies stood just below $1 trillion; seven months ago, that figure approached $3 trillion.

Though legacy financial markets also have turned sour in recent months—owing to fears of a coming recession, historically high inflation, lingering supply shocks sparked by the pandemic, and the war in Ukraine—the crypto world’s descent has been far more severe than Wall Street’s. The S&P 500, widely viewed as a benchmark of financial performance over time, has fallen 18% so far this year.

The depths of bitcoin’s decline highlights the highly volatile nature of cryptocurrencies and how such astounding growth that launched portfolios skyward can just as easily reverse.

Three Arrows Capital was created in 2012 by Su Zhu and Kyle Davies, and it is known for its bullish moves on crypto. Zhu had taken the position that the value of cryptocurrencies would continue to rise as more people invested in it and its usage became more mainstream. But he recently conceded he was mistaken, saying on Twitter in May that his price thesis was “regrettably wrong,” adding, “but crypto will still thrive and change the world every day.”

In a subsequent tweet earlier this month, Zhu’s tone turned more dire. “We are in the process of communicating with relevant parties and fully committed to working this out,” he said, without explicitly saying what the issue was or who the relevant parties were. Reports of financial distress soon followed.

Days after Zhu’s cryptic tweet, the Financial Times reported that Three Arrows Capital had failed to meet demands from lenders to show extra funds after its bets on digital currency had gone wrong.

The loan default follows a decision by the embattled cryptocurrency bank Celsius to halt withdrawals by its nearly 2 million users, sending shock waves through the crypto market and underscoring the concerns that the sector’s biggest names lack meaningful financial oversight. However, the possibility of disruptions overflowing to the larger economy appears limited.

Rampant theft has also plagued crypto investors, drawing increasing skepticism from critics who question the enduring financial vulnerabilities of digital currencies.

Last week, the blockchain company Harmony announced that hackers had seized roughly $100 million in cryptocurrency by exploiting the firm’s ethereum and Binance Chain bridge. Blockchain functions as a decentralized ledger, a record of transactions that is publicly available and verifiable but not maintained by any one entity. A blockchain bridge works as a means of decentralized transfers between ledgers.

As the value and popularity of tokens has swelled in recent years, so has the nefarious interest among criminals. Crypto-related crime hit an all-time high of $14 billion last year, according to research from Chainalysis, up from $7.8 billion in 2020.

Though many first-time investors have flocked to the promises of digital currencies and their sometimes-staggering returns, the market has shifted to a far more pessimistic posture.

As interest rates rise and an array of economic hardships drag down highflying companies, investors have also fled speculative assets such as cryptocurrencies. Some of the biggest players in the industry, including Coinbase and Gemini, have eliminated positions and frozen hiring, reflecting the icy mood that now defines the once red-hot market.