Systemic Risk, Mass Settlement Threatens Bitcoin With Large Hedge Fund Crisis

The risk of a contamination of the crypto market after the collapse of the Terra project (LUNA) has returned to the center of the debate among industry experts amid fears that Three Arrows Capital (3AC), one of the largest crypto hedge funds, has overexposed to risk and is close to becoming insolvent.

How far will cryptocurrencies go? What’s the best way to buy them? We have prepared a free class with step by step. Click here to watch and receive InfoMoney’s cryptocurrency newsletter

3AC has been around since 2012, but gained attention after investing heavily in several famous crypto projects such as Ethereum (ETH), Aave (AAVE), Solana (SOL), Avalanche (AVAX) and Axie Infinity (AXS), among others. At one point, the crypto fund managed $18 billion in assets.

As crypto markets have plummeted in recent months, however, clues have begun to surface that much of this capital was allocated to extremely risky and highly leveraged investments. In April, the fund’s cryptos were already worth $3 billion.

Three Arrows Capital has investments in a number of cryptocurrencies, and experts suspect they may have been used as collateral to borrow on centralized platforms and DeFi protocols, which run on smart contracts (and automatically liquidate positions with little collateral).

“What we have reported so far is that Three Arrows Capital has deposited crypto assets as collateral, borrowed and used that money for other operations. For example, it is possible to deposit Bitcoin as collateral and borrow a dollar, and with that dollar buy more Bitcoin, which sets up leverage”, explains Samir Kerbage, Hashdex’s chief technology officer, participating in Crypto+ (watch the entirety in the player above ).

One of Three Arrows Capital’s problems became evident when Terra (Luna) ecosystem cryptos evaporated from the market in May. In an interview with the Wall Street Journal last week, Kyle Davies, co-founder of 3AC, admitted that the company had $200 million in Luna, and that the project’s plight caught the fund “off guard.”

There is even suspicion that the fund deposited loans in the Anchor protocol, which delivered 20% annualized return on Terra USD (UST), a stablecoin that went to zero last month after it collapsed.

Investors fear that, if this is true, the 3AC money deposited there will also turn to dust, eliminating the amounts that should have been used to pay counterparties for the borrowed credits. “As the price of Bitcoin has dropped sharply, these counterparties [são obrigadas a] liquidate their position, take the guarantee he deposited and sell it to convert it into dollars and pay off the loan”, says Kerbage.

“Once problems start to appear, it becomes obvious how much risk exposure they had. There is something classic in the market which is the need to manage credit risk. If you’re lending money to someone or you’re investing in DeFi platforms, you need to do that job.”

Read more:

According to the Hashdex specialist, the big risk posed by the case of Three Arrows Capital is the occurrence of a cascade of liquidations that could affect other players and result in another strong fall in the markets.

“When you have a liquidation event, there is a very high volume of collateral being sold at the same time in the market. And those entities that have lent money to Three Arrows Capital have every incentive to do so as quickly as possible, regardless of the price impact.”

Analysts with whom the InfoMoney CoinDesk talked about in recent days point out that the latest sharp drop in Bitcoin and Ethereum were already, in part, a result of the liquidation of positions of large players that operated with high leverage on lending platforms. However, it is not yet known if these liquidations have ended, and if they can still infect agents that until now have not been exposed to this risk – because they have a much lower liquidation price, for example.

“There is a systemic risk from all these liquidity problems, from Terra (Luna), then Celsius [Network, que bloqueou saques] and now Three Arrows, and even reports from other lending platforms [empréstimos] having liquidity problems. The concern that exists in the market is whether this risk can spread and cause a systemic risk and cause a mass liquidation”, emphasizes Kerbage.

“We still don’t know the extent of these liquidations and the systemic effect, if someone lent money to Three Arrows Capital and it could go bankrupt as well, other players being contaminated by this bankruptcy, and becoming insolvent. It has this short-term risk.”

How far will cryptocurrencies go? What’s the best way to buy them? We have prepared a free class with step by step. Click here to watch and receive InfoMoney’s cryptocurrency newsletter

Source link

About Admin

Check Also

Bitz will give money back in partnership with Uber

Bitz gives special cashback for prepaid Uber purchases, but only for one day! See how …

Leave a Reply

Your email address will not be published.