Court Orders 3AC to Liquidate as Miner Selloff Threatens Bitcoin

The crypto contagion resulting from the steep drop of BTC/ETH prices and collapsed Terra (LUNA) continues to evolve. The troubled Three Arrows Capital (3AC) hedge fund is poised to be liquidated after a British Virgin Islands court actually ordered liquidation. 

According to Sky News, Teneo Restructuring, a NY-based company specialized in corporate consultancy and insolvency, will handle the technical details. This appears to be the culmination of “working this out”, posted by 3AC’s co-founder Zhu Su as his last tweet since June 15th.

Just as users’ funds get liquidated when margin called, so does 3AC liquidation entail selling off its assets to meet debt obligations. It is now only a question of which assets (if any) does 3AC have left, at what pace will the fund’s assets be sold, and to whom. 

3AC’s Exposure and Creditor Fallout

After Terra (LUNA) wiped out an excess of $44 billion in crypto wealth due to the de-pegging of its UST stablecoin, it was only a matter of when the next domino was going to drop. 3AC was exposed to Terra’s ecosystem in the range between $200 million to $450 million. Kyle Davies, one of the fund’s co-founders, openly admitted to WSJ that they were caught off guard.

Furthermore, Su Zhu espoused the so-called super cycle theory, which posited that digital assets are still in the initial stages of adoption so they can’t really crash. However, with both Bitcoin and Ethereum falling over 3x from their ATHs, the entire over-leveraged and mutually exposed ecosystem turned unstable. 

So far, crypto lender BlockFi liquidated all 3AC positions. Specifically, its overcollateralized margin loan. Likewise, Genesis Trading’s CEO Michael Moro informed the public on June 17th that a “large counterparty” failed to meet a margin call, which was a clear reference to 3AC. Other liquidations followed intermittently, from Bitmex, FTX, and Bitumen.

As one over-exposure led to another, crypto broker Voyager Digital (VOYG.TO) found itself in trouble as well. Voyager had loaned 15,250 bitcoins and $350 million to 3AC, which the fund failed to pay back, resulting in a default notice. In turn, the CEO of FTX, Sam Bankman-Fried, together with Alameda Research, offered Voyager and BlockFi bailout credit lines, $250 million and $200 million respectively. 

“I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion,”

Sam Bankman-Fried, CEO of FTX

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SBF Sees Further Contagion Spread

After rescuing BlockFi and Voyager Digital, the 30-year-old bailout billionaire warned of more danger to come. For a growing industry without government’s protection, SBF sees it as his duty to stabilize the ecosystem unless it harms all market participants, big and small. 

After SBF acquired 7.6% of Robinhood (HOOD) shares, it was even speculated that he was going to buy Robinhood’s stock trading platform itself. This is not that surprising given that HOOD stock went down 76% since its IPO. On the other hand, SBF is known to acquire troubled companies, such as Japanese Liquid and Canadian Bitvo exchanges.

Acquisition from a position of strength, which also eliminates emerging competition, is a standard “vulture capitalism” practice. However, in a recent interview to Forbes, SBF noted there are many exchanges that are too troubled to be helped.

“There are companies that are basically too far gone and it’s not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues, or that there is not much of a business left to be saved,”

Fortunately, he was referring to “third-tier exchanges”. According to SBF, some are already “secretly insolvent”. 

Bitcoin’s Price Stable but Uncertain

After panicking the market by briefly dipping into $18k territory, Bitcoin has been trading sideways at $20k for a couple of weeks. This is deja vu of its seemingly resistant $30k range from the previous months. At these resistance thresholds, it is typical that trading volume increases substantially to defend the price.

However, this defense depends on the incoming selling pressure, which largely resides in Bitcoin miners’ hands. And their hand was forced by their financial obligations, triggering a massive BTC selloff in May.

In other words, more miners will have to sell their BTC holdings at a loss. SBF noted that mining companies that increased their debt during the H2 2021 bullrun are likely to be most stressed. After all, they acted under the assumption that Bitcoin was going to $100k, not over 3x lower.

Do you think more people will jump in to “buy the dip” if miners erect a selling pressure? Let us know in the comments below.