A vague tweet by a founder of Three Arrows Capital, an influential hedge fund that has been liquidating crypto holdings as prices plummeted, is stirring fresh apprehension in an already shaken industry.
“We are in the process of communicating with relevant parties and fully committed to working this out,” former Credit Suisse Group AG trader Zhu Su tweeted from his verified account, without providing further details. Zhu and Three Arrows co-founder Kyle Davies didn’t respond to requests for comment.
While information on the fund’s size and trading strategies is sparse, blockchain analytics firm Nansen estimated in early March that Three Arrows managed about $10 billion. It owned more than 5% of the Grayscale Bitcoin Trust as of December 2020, according to the latest available regulatory filings, though it’s unclear whether Three Arrows has maintained that position. The trust has a market value of about $10 billion.
Crypto markets had already witnessed two high-profile blowups since early May, roiling an asset class that was already under pressure from tightening monetary policy. First, the Terra decentralized-finance ecosystem collapsed when an algorithmic stablecoin that was a key part of it crumbled from its dollar peg. About a month later, crypto lender Celsius froze withdrawals on a platform where it offered high returns, citing a need to “stabilize liquidity”.
Recent attention on Three Arrows has centered around its exposure to a cryptocurrency called staked Ether, or stETH.
The fund started withdrawing stETH from decentralized platforms last month, according to Nansen. As recently as Tuesday morning, it withdrew more than 80,000 stETH from decentralized lending project Aave in four transactions and then swapped 38,900 of the stETH for 36,700 Ether.
The trade may have resulted in a “big haircut,” said Andrew Thurman, content lead at Nansen. The stETH token is supposed to be redeemable for one Ether coin, after a planned upgrade to the Ethereum network takes effect. Swapping stETH into Ether at lower than 1-to-1 ratio could be an indicator of urgent liquidity needs, market observers say.
The price of stETH has tumbled 41% in the past seven days to $1,055.14, while Ether has declined 39% to $1,116.17, according to CoinGecko.
Three Arrows was among investors in a $1 billion sale of the Luna cryptocurrency in February. Luna, the sister token of the TerraUSD stablecoin, lost almost all its value in May when TerraUSD’s dollar peg broke. A coin that was distributed to Luna holders to help compensate for their losses has slumped 87% from a May 28 high, data from CoinGecko show.
Zhu said in late April that Three Arrows was planning to move its headquarters to Dubai from Singapore, citing opportunities to expand the business. The fund was at the “early stages of exploring” raising money, he said on the Signal messaging app at the time, without providing details.
The total market value of cryptocurrencies tracked by CoinGecko has plunged to $944 billion from $3 trillion in November.