Voyager said it intended to recover the funds, which were loaned out in the form of 15,250 bitcoins and $350 million in the USDC stablecoin, a digital token whose value is pegged to the dollar.
“We are working diligently and quickly to strengthen our balance sheet and seek options so that we can continue to meet customer demands for liquidity,” said Stephen Ehrlich, chief executive of Voyager.
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The company said it was in talks with advisers to consider legal remedies.
Three Arrows Capital did not immediately respond to a request for comment.
The default comes at a perilous time for cryptocurrencies, as industry players and investors brace for a “crypto winter” after a price crash and abrupt layoffs, and amid a renewed and emboldened sense of skepticism that has boiled over into condemnation among critics and market watchers. The industry’s high level of interconnectedness has also triggered warning signs. Many companies borrow from and invest in each other, and the risks to investors are magnified because the failure of one institution could spill over to others.
Across the industry, investors suffered huge losses. Bitcoin, the most important cryptocurrency, was trading around $20,700 on Monday, well below its November peak of around $69,000. Meanwhile, the market value of all cryptocurrencies was just below $1 trillion; seven months ago, that figure approached $3 trillion.
Although legacy financial markets have also turned sour in recent months – on fears of a coming recession, historically high inflation, lingering pandemic-triggered supply shocks and war in Ukraine – the descent of the crypto world has been much more severe than that of Wall Street. . The S&P 500, widely considered a benchmark of financial performance over time, has fallen 18% so far this year.
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The depth of bitcoin’s decline highlights the highly volatile nature of cryptocurrencies and how such stunning growth that has launched wallets skyward can just as easily reverse.
Three Arrows Capital was established in 2012 by Su Zhu and Kyle Davies, and is known for its bullish moves in crypto. Zhu had taken the position that the value of cryptocurrencies would continue to rise as more people invested in them and its use became more common. But he recently admitted he was wrong, saying on Twitter in May that his price thesis was “sadly wrong,” adding, “but crypto will continue to thrive and change the world every day.”
In a subsequent tweet earlier this month, Zhu’s tone became more serious. “We are in the process of communicating with the affected parties and we are fully committed to resolving this issue,” he said, without explicitly saying what the problem was or who the affected 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 respond to requests from lenders to show additional funds after its digital currency bets went bad.
The default follows a decision by embattled cryptocurrency bank Celsius to halt withdrawals from its nearly 2 million users, sending shockwaves through the crypto market and underscoring concerns that Biggest names in the industry lack meaningful financial oversight. However, the possibility of the disruptions spilling over to the economy as a whole seems limited.
The rampant theft has also plagued crypto investors, sparking growing skepticism from critics who question the continued financial vulnerabilities of digital currencies.
Last week, blockchain company Harmony announced that hackers had seized around $100 million in cryptocurrency by exploiting the company’s Ethereum and Binance Chain bridge. The blockchain operates as a decentralized ledger, a publicly accessible and verifiable record of transactions, but not maintained by a single entity. A blockchain bridge works as a medium for decentralized transfers between ledgers.
As the value and popularity of tokens have increased in recent years, nefarious interest from criminals has also increased. Crypto-related crime hit an all-time high of $14 billion last year, according to research by Chainalysis, up from $7.8 billion in 2020.
Although many new investors have flocked to the promise of digital currencies and their sometimes staggering returns, the market has shifted to a much more pessimistic posture.
As interest rates rise and a series of economic difficulties weigh on high-flying companies, investors have also been fleeing speculative assets such as cryptocurrencies. Some of the biggest players in the industry, including Coinbase and Gemini, have cut positions and frozen hiring, reflecting the frosty mood that now defines the once-hot market.