This article takes a look at Three Arrows Capital, the crypto hedge fund that spectacularly collapsed earlier this year. At one stage Three Arrows was the most highly regarded investment fund in the crypto space, but its collapse was embarrassing for the managers and excruciating for the broader crypto ecosystem, especially those companies that it had borrowed money from.
Some of the big crypto company collapses of this year were contagion from the Three Arrows collapse. Voyager Digital filed for bankruptcy in July, reporting that Three Arrows owed it more than $650 million. Genesis Global Trading lent Three Arrows $2.3 billion. Blockchain.com lent $270 million, and has now been forced to lay off a quarter of its staff. Some in the crypto industry blame the whole crypto crash of 2022 on Three Arrows (although that is unlikely, it is more likely a result of rising interest rates, inflation and the broader market selloff in all growth assets).
By mid-July, creditors had come forward with $2.8 billion in claims. That money all appears to be gone now and the two founders of Three Arrows are believed to be in hiding. This article takes a look at the two founders, the fund they built and how it all went so wrong.
In reading this story, it reminds us of Long Term Capital Management, the hedge fund that blew up in 1998. LTCM was a highly-leveraged hedge fund and their managers were seen as the smartest guys in the room. Similar to the Three Arrows founders. LTCM blew up after the 1997 Asian financial crisis and 1998 Russian financial crisis and the Federal Reserve had to step in to stop contagion spreading to the rest of the financial sector. With no Central Bank to step in to support Three Arrows, we are seeing the contagion spread across the rest of the crypto industry.
This is an excerpt from our Thought Starters email. Once a week we send you 5 interesting articles that have caught our attention, to get you thinking. No spam, we guarantee.