An unprecedented crisis of confidence has affected the crypto industry for several months.
To measure it, simply consider the price of a cryptocurrency, which is usually tied to a platform or a project. The crypto market has lost $2 trillion in value since hitting an all-time high of $3 trillion in early November, according to the data firm. CoinGecko. The price of bitcoin, the king of crypto, is down more than two-thirds since hitting an all-time high of $69,044.77 on November 10.
The severity of the crisis increase early this spring with an event that seems to have been contained. In early May, the sister coins of Luna and UST or TerraUSD collapsed. The drop in the two cryptocurrencies was caused by many investors wanting to liquidate their positions at the same time. At least $55 billion was wiped out in this disaster.
What may have appeared as an isolated event has finally revealed itself as an octopus with many branches. A month later, Celsius Cryptocurrency Lending Network, which acts like a bank, announced that they are suspending withdrawals, thus preventing their customers from having access to their funds. A few days later, Three Arrows Capital, or 3AC, a hedge fund based in Singapore, said that it was surprised by the introduction of Luna, a digital currency that the company is already worth over 200 millions of dollars.
Voyager Digital, another crypto lender, has announced that 3AC has defaulted on a loan of at least $630 million that it extended to it. Babel Finance, CoinLoan, CoinFlex, and other crypto lenders have also suspended withdrawals. BlockFi, one of the big names in the field, was forced to calls for help from young crypto billionaire Sam Bankman-Fried, the founder of the FTX.com platform. The liquidity crisis extends to other small lenders like Vauld. Blockchain.com cryptocurrency exchange warning its shareholders that it could lose $270 million related to 3AC.
Dominoes start to fall: 3AC forced liquidated, Voyager Digital and Celsius Network have filed for Chapter 11 bankruptcy. BlockFi has been bailed out and the future of the others remains uncertain. As for their customers, they do not know when they will get even a small part of their money back.
The link between all these companies and the platform is 3AC, the hedge fund. It seems from the company’s statements and official documents that a large number of crypto-lending institutions have lent it money. But they don’t seem to know that they are usually hedge fund creditors.
3AC Is A ‘Classic Madoff Ponzi Scheme’
Three Arrows Capital is operating like a Bernie Madoff Ponzi scheme in disguise, research firm FSInsight, an independent research firm, said in a recent interview. report. The company is an “old-fashioned Madoff Ponzi scheme” that occupies the same positions as those that sank Long-Term Capital Management (LTCM), FSInsight said.
Long Term Capital is a well-known hedge fund, run by prominent Wall Street traders and Nobel Prize winning economists. The company went down in 1998, forcing the government to intervene to prevent a market crash.
In the case of Three Arrows, Kyle Davies, 35, and Su Zhu, 35, the founders, are operating like Bernie Madoff, notes research that delves into the hedge fund demise. Davies and Zhu “used their reputation to recklessly borrow from every lender in the business,” FSInsight wrote.
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Zhu and Davies are likely “using borrowed money to pay interest on loans issued by lenders, while ‘cooking’ their books to represent a large capital return,” the note added. .
This conclusion raises questions about whether 3AC’s financial statements are true. At its peak, the hedge fund said it had more than $18 billion under management. But according to Sean Farrell, head of digital assets at FSInsight, given the level of exposure crypto lenders must have to the hedge fund, it is likely that the majority of its assets are purchased. debt and its mortgage rate is quite small.
A Ponzi scheme is a fraudulent financial arrangement that involves paying existing investors large profits using capital invested by new investors. This fraud is based on the reputation of the people being scammed. It is usually only disclosed when funds brought in by new investors are no longer sufficient to cover payments to previous investors. This fraudulent system was used by former Nasdaq President Bernard Madoff for the largest Ponzi scheme in history.
‘People can call us idiots’
“The Terra-Luna situation caught us off guard,” Davies tried to explain in June.
Since then, two former Credit Suisse tellers, who became friends in high school, have gone into hiding. They recently did a phone interview, which was announced on July 22, to Bloomberg News.
“People may call us stupid. They may call us stupid or delusional. And, I will accept that. Maybe,” Zhu told the outlet. “But you know, they’re going to say I dropped the fund in the last period, where I actually put a lot of my personal money back. That’s not true.”
Davies told the magazine: “The whole situation is unfortunate. “Many people have lost a lot of money.”
“What we didn’t realize is that Luna has the potential to drop to effectively zero in a few days and this will catalyze a credit squeeze across the industry that puts significant pressure on all illiquid positions. our account,” added Zhu.
Looking back, two former Credit Suisse traders say their failure looks like LTCM.
“It was very much like a LTCM moment for us, like a Long Term Capital moment,” said Zhu. And then they’re all marked super fast, very fast. “
The companies responsible for the liquidation of the hedge fund complained about the two co-founders’ refusal to cooperate, which the co-founder refused.