A wound needs time to heal. Lately, the cryptocurrency market is like a wounded bear that could use a break to heal. However, a certain cryptocurrency hedge fund has decided to poke at this wound, leading to a Wound dehiscence. This cannot be good.
The careless tweet by a founder of Three Arrows Capital has been liquidating holdings since the recent crypto crash started. This leads to even more damage in an already wobbling industry.
So Much Power For A Tweet
Zhu Su, a former trader at Credit Suisse Group AG, tweeted; “We are in the process of communicating with relevant parties and fully committed to working this out.” zhu said this without giving further details. He and Kyle Davies, when asked for further comment, declined.
Kyle Davids – the co-founder of Three Arrows – and Zhu are said to be the biggest crypto holders right now. So, it’s easy to see why just a tweet from them could cause a frenzy in the industry.
Three Arrows was estimated in March to be managing around $10 billion in assets, according to blockchain analytics firm Nansen. While information on its trading strategies is sparse, Three Arrows is known to hold stakes in a diverse range of different crypto assets. It also owned more than 5% of the Grayscale Bitcoin Trust — the world’s largest Bitcoin fund — as of December 2020, according to the latest available regulatory filings, though it’s unclear whether Three Arrows has maintained that position.
Why This Period Is Crucial For Hedge Funds?
We need to understand that Three Arrows is amongst the highest-profile players in the decentralized arena. An arena characterized by the use of cryptocurrencies as collateral for major loans and bets. Eventually, when the market goes through bear situations, tokens are devalued. This forces funds like Three Arrows to either spend more on support or get wiped out.
Crypto markets had already witnessed two high-profile blowups since early May. Unfortunately, this has led roiling an asset class that was under pressure from tightening monetary policy. First, the Terra decentralized-finance ecosystem collapsed when an algorithmic stablecoin. It was a key part of it 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.”
Three Arrows was among investors in a $1 billion sale earlier this year of Terra’s Luna cryptocurrency. However, recent attention around the fund has pivoted around its exposure to a digital-currency known as staked Ether (stETH). Staked Ether is a token by DeFi software, Lido Finance which has now become widely used in the industry today.
Three Arrows’ Involvement In The ‘Big Cut’
The original plan was to make the stETH redeemable for one ETH coin once the Ethereum blockchain upgrades. Furthermore, lido offers users an interest rate encouraging them to lock up their Ether, gaining passive income without selling.
In exchange for this, they receive stETH. With it they can then lend or trade on other platforms while they wait for the protocol to finish upgrading. Three Arrows are into this kind of trades. And due to the selling pressure which caused stETH to uncouple from Ether, the fund started withdrawing stETH from decentralized platforms.
As at the early hours of Tuesday, the fund withdrew more than 80,000 stETH from decentralized lending project Aave. They achieved this in four transactions and then swapped 38,900 of the stETH for 36,700 Ether.