Three Arrows Capital has $10 billion in assets and is one of the most prominent hedge funds in the world.
The firm, also known as 3AC, is headed to bankruptcy court after it was unable to repay its debts due to the plunge in the price of cryptocurrencies.
A chain of pain may be starting. 3AC had a long list of counterparties that had their money wrapped up in the firm's ability to survive. With the market down by more than $1 trillion since April, investors with concentrated bets on firms like 3AC are feeling the effects.
There is a $270 million hit on loans to 3 AC. 3AC couldn't pay back $670 million it borrowed from the company and that's what led to the filing of Chapter 11 for the digital asset broker. Genesis and BlockFi are among the U.S.-basedcryptocurrencies that are being hit with losses.
Nic Carter, a partner at Castle Island Venture, said that credit is being destroyed and withdrawn and that everyone is pulling their money out of the market.
Borrowing money from across the industry was part of Three Arrows' strategy. The firm had been around for a decade, which gave the Davies brothers a measure of credibility in an industry filled with rookies. He co-hosted a popular show on the internet.
According to a professor at the University of Southern California, 3AC was supposed to be the adult in the room.
According to court documents reviewed by CNBC, lawyers for 3AC's creditor claim that they haven't begun to cooperate with them in any meaningful way. According to the filing, there is no cash to pay back the company's lender.
Requests for comment were not responded to by the two people.
The collapse of terraUSD in May of this year led to the fall of Three Arrows Capital.
Despite the promise that it would keep its value, the stability of UST was reliant on a complex set of code, with very little hard cash to back it up. Many analysts said the rate of 20% annual yield on their UST holdings was unsustainable.
Alkesh Shah is a global digital asset strategist at Bank of America.
$60 billion was lost due to panic selling associated with the fall of UST.
The collapse of the terraUSD and luna is the center of attention in the digital currency world. The first domino to fall was the meltdown.
The Wall Street Journal quoted 3AC as saying it had invested $200 million in luna. The fund had an exposure of $560 million, according to other reports. The investment was rendered useless when the stable coin project failed.
As a result of the implosion of UST, confidence in the sector was shattered and the slide in cryptocurrencies began.
There was a flood of margin calls, but the money wasn't there. Retail holders who had been promised 20% annual returns were unable to meet demands from many of the firm's counterparties.
Billions of dollars in creditor's funds were evaporated by them.
Peter Smith, the CEO of the company, said in a letter to shareholders that his company's exchange "remains liquid, solvent and our customers will not be affected." It's not the first time investors have heard that type of sentiment.
The cascade hits any player in the market with a lot of exposure to the asset and cash crunch. Retail investors have no idea what to make of the lack of consumer protections.
The email stated that it would be awhile before the customers could access their funds. Stephen Ehrlich, the company's CEO, said on the social networking site that after the company goes through a reorganization, customers could potentially get a bag of stuff.
That could include a combination of thecryptocurrencies they held, common shares in the reorganizedVoyager, and whatever proceeds they get from 3AC. The investors don't see much reason for optimism.
There is a solvency crisis among thecryptocurrencies.
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