July started with a lot of negative news, pushing the price of top cryptocurrencies down at times. The price of bitcoin has fallen below the all-time high of the 2017 bull cycle for the first time. The unexpected events of June and early July has been on the troubles of prominent hedge funds.
3AC Looks Like a Gonner
On July 2, Three Arrows Capital (3AC), one of the most popular hedge funds in the cryptocurrency industry, reported filing for Chapter XV bankruptcy with the Southern District of New York Bankruptcy Court.
Bankruptcy approval is likely 3AC’s only option at this present after Voyager’s announcement of the company defaut. 3AC is seeking bankruptcy protection under U.S. regulation.
Without bankruptcy protection, 3AC’s creditors will take them to court for assets.
If this occurs, an orderly liquidation of assets and maintaining creditor fairness will be impossible. The fund also stated that one of its creditors has initiated legal action against 3AC in a New York court.
No Big Surprise
Investors are not surprised by 3AC’s bankruptcy because this fund invested heavily in LUNA and UST, and when these two tokens failed, it set off a domino effect that resulted in the loss of many high-profile individuals and large companies’ investments.
Earlier in June, digital asset broker Voyager Digital announced that the 3AC failed to repay a $350 million loan in USD-pegged stablecoins USDC and 15,250 Bitcoins. The above loans were previously lent to 3AC by Voyager Digital but the lender did not disclose the specific time.
In addition to 3AC defaut, the ongoing market crash, ignited by the collapse of Terra (LUNA), dragged many crypto VC funds down since they currently have no financial capability to survive. 3AC bankruptcy entails many consequences for financial corporations, including Voyager.
Recently, Voyager Digital has suspended all customer deposits and withdrawals. The company’s CEO said that the decision gives the company more time to continue to find a solution and that they will provide additional information at the appropriate time.
The problem with the big lender is that they lend to 3AC with very little or no mortgage. As 3AC has financial problems and is now bankrupt, the chances of recovering loans is very low.
According to Voyager’s report, the company’s total assets are valued at more than $658 million, loan assets are around $1.2 billion but the mortgage amount is just over $168 million.
During the liquidity crisis, Sam Bankman-Alameda Fried’s Ventures provided some bailouts to lenders, specifically Voyager and BlockFi. The CEO of the FTX exchange loaned $485 million to Voyager Digital and $400 million to BlockFi.
Aside from these bailouts, FTX is pursuing an acquisition deal with BlockFi. It looks like Bankman-Fried and FTX are playing a godlike role, stepping in and rescuing troubled firms in order to prevent a total collapse.
Is Sam Bankman-Fried the cryptocurrency’s central banker? What Sam is doing is quite similar to what J.P. Morgan did during the Panic of 1907.
If these bailouts work, FTX (and Sam, of course) may make a fortune in the long run. Otherwise, it could result in a complete crash and a massive run on all exchanges, including FTX.
Many sectors, notably NFT, were significantly impacted in association to the market’s collapse. Ethereum (ETH), the blockchain that accounts for 84.7% of the NFT market share, is also experiencing the same fate as Bitcoin, as it has consistently closed red candles in recent weeks.
Another significant change this quarter is the Fed’s dramatic hike in interest rates to combat high inflation. Since March 2022, the bank has increased interest rates by 1.5 points, and other central banks are following suit through the end of the year.