The crypto industry was “brought to its knees” in recent weeks by an “old-fashioned Madoff-style Ponzi scheme” wrapped in a trade that was similar to the positions that sunk Long Term Capital Management
(LTCM),” research firm FSInsight said in a report Friday looking at the implications of the implosion of cryptocurrency hedge fund Three Arrows Capital (3AC).
In this scenario, Bernie Madoff would be likened to prominent Tether clients Su Zhu and Kyle Davies, who used their reputation to “recklessly borrow from just about every institutional lender in the business,” resulting in the collapse of many high-profile names in the industry, including Voyager Digital, Babel Finance and BlockFi.
During the peak of the crypto markets last year, 3AC reportedly had over $18 billion in assets. But due to the speculative nature of their investments, no one knew beforehand how much equity was truly at risk.
Because of the massive size of exposure that companies like Voyager and BlockFi had to 3AC, it appears that the vast majority of 3AC’s assets were bought with debt and its collateralization ratio was quite small.
The collapse of 3AC was mainly due to the macro conditions that preceded destruction in global asset prices, reducing the collateral value of any crypto asset, and 3AC was heavily invested in LUNA/UST, which couldn’t have helped the situation, however, we think the downward spiral started with 3AC’s over-leveraged bet on Grayscale Bitcoin Trust (GBTC).
Once Tether stopped printing money to artificially hold up the markets, and asset prices collapsed, and margin calls were triggered, 3AC could no longer hold its “daisy chain of leverage together,” which caused illiquidity issues across the whole crypto lending space. The over-leveraged nature of this arbitrage trade is similar to the types of trades that were the “death knell” for Long Term Capital Management, the report added.
Recent on-chain data also confirms what we predicted months ago, extreme capitulation among bitcoin holders. There still remains a risk that growing miner positions could be a source of further selling pressure.
Make no mistake, however, this is just the first of many Bitcoin Ponzi Schemes that are expected to collapse. Like most of them, they are “conveniently” heavily connected to Tether, which we warned about several months ago as being the largest scam on earth.
Voyager Digital plans to sue Three Arrows Capital
In recent news, Three Arrows Capital failed to repay two loans worth a total of $670 million from the crypto trading platform Voyager Digital by the required deadline.
Voyager had made two loans to Three Arrows Capital, or 3AC, of 15,250 Bitcoins and $350 million worth of stable coins. The crypto brokerage has since issued a notice of default and wants to take 3AC to court in order to settle this dispute.
The stock prices for Voyager have since tumbled 99.99% as investors fear the company will soon go bankrupt, which is likely the case.
This entire situation should be a reminder of how dangerous the crypto echo chamber can be. Almost all Bitcoin maximalists once believed 3AC was the best fund on the planet, yet it disappeared in days…