Crypto hedge fund tweet fuels speculation of losses

A vague tweet from the founder of Three Arrows Capital, an influential hedge fund liquidating crypto holdings with plunging prices, is raising new fears in an already shaken industry.

“We are in the process of communicating with relevant parties and are fully committed to fulfilling this,” tweeted Credit Suisse Group ag trader Zhu Su from his verified account, without providing further details. Zhu and Three Arrows co-founder Kyle Davis did not 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. According to the latest available regulatory filing, Grayscale Bitcoin Trust owned over 5% as of December 2020, although it is unclear whether Three Arrows has maintained that position. The market value of the trust is approximately $10 billion.

The crypto markets had already seen two high-profile explosions since early May, troubling 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 significant part of it fell from its dollar peg. About a month later, crypto lender Celsius halted withdrawals on a platform where it offered higher returns, citing the need to “stabilize liquidity”.

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Recent attention to Three Arrows has centered around exposure to a cryptocurrency known as Staking Ether, or STET.

According to Nansen, the fund began withdrawing STET from decentralized platforms last month. As recently as Tuesday morning, it withdrew over 80,000 stETH from decentralized lending project Aave in four transactions and then swapped 38,900 of stETH for 36,700 Ether.

‘Big Haircut’

The business could result in a “big haircut,” said Andrew Thurman, content lead at Nansen. After the planned upgrade to the Ethereum network takes effect, stETH tokens can be redeemed for one Ether coin. Market observers say that converting stETH to Ether at a less than 1 to 1 ratio could be an indicator of an urgent need for liquidity.

According to CoinGecko, the price of stETH is down 41% to $1,055.14 in the past seven days, while ether is down 39% to $1,116.17.

Three Arrows was among investors in a $1 billion sale of Luna cryptocurrency in February. The TeraUSD stablecoin’s sister token Luna lost almost all of its value in May when TeraUSD’s dollar peg broke. Data from CoinGecko shows that a coin distributed to help Luna holders recover their losses is down 87% from its May 28 high.

Zhu said in late April that Three Arrows was planning to move its headquarters from Singapore to Dubai, citing business expansion opportunities. He said at the time, without giving details on the Signal messaging app, the fund was in the “early stages of discovery”.

The total market cap of cryptocurrencies tracked by CoinGecko has fallen from $3 trillion in November to $944 billion.