The crypto market is currently in a bit of a disastrous state. Many exchanges, lending platforms and hedge funds have been holding on by just a few threads. Unfortunately, it appears that they can no longer hold on for dear life. The two most recent institutions who have filed for bankruptcy include Three Arrows Capital, a Singapore-based crypto hedge fund and Celsius Network LLC, a crypto loan company.
In this article, RR² Capital discusses the demise of Three Arrows Capital & Celsius.
Crypto Firms Who Have Filed for Bankruptcy
Unfortunately, the current market conditions have wreaked havoc throughout the crypto industry and caused many crypto firms to go under. The bankruptcies come after the crypto market nosedived from setting new ATHs a little over 6 months ago. Below are some of the most recent firms to land in hot water:
Three Arrows Capital
Three Arrows Capital (3AC) is a Singapore-based crypto hedge fund founded in 2012 by Kyle Davies and Su Zhu. 3AC, in its better days, was one of the most prominent crypto hedge funds.
What Caused 3AC to Go Bankrupt?
A massive slump in digital currency prices, which has resulted in hundreds of billions of dollars being wiped off the market, has exposed a liquidity crisis at 3AC. On 27 June 2022, Voyager Digital said that 3AC had not made payments on an over collateralized margin loan of $660 million. That same day, a court in the British Virgin Islands ordered the hedge fund to be liquidated. A few days later, 3AC filed for chapter 15 bankruptcy in the US. This essentially allows a foreign debtor to deal with their US-based assets.
Voyager Digital reportedly had significant investments in 3AC that failed to make payments on a margin loan of 15,250 Bitcoin and $350 million USDC.
What Projects Did 3AC Invested In?
The fund was one of the largest holders of various crypto assets that are currently down around 80% from their ATHs. At one point, the fund is estimated to have managed $10 billion in assets. Some of their investments include:
- Solana (SOL)
- Terra (LUNA)
- Axie Infinity (AXS)
- BlockFi
- Coincident Capital
The Founders of 3AC
The founders of 3AC were Kyle Davies and Su Zhu, childhood friends, and Wall Street currency traders. After 3 years at Credit Suisse, Davies and Zhu quit to start their own firm.
10 years later, in a crypto tale all too common, the founders, Zhu and Davies, cannot be located. According to a filing with the US Bankruptcy Court in New York’s Southern District, liquidators reported that the whereabouts of Zhu and Davies are currently unknown.
There’s been much speculation that Zhu and Davies have fled to Dubai, as the United Arab Emirates lacks a formal extradition treaty with the US. Unfortunately, the sudden bankruptcy of Three Arrows Capital has spread even more fear and contagion throughout the cryptosphere.
Celsius
Celsius is another victim of the current bear market. In early June 2022, crypto lending company, Celsius, announced that it was pausing customer withdrawals as a result of extreme market conditions.
In July 2022, the company became another name on the list of companies filing for bankruptcy. The news sent shockwaves across the crypto market, especially for those who had their digital assets locked in Celsius.
Less than 1 month before halting withdrawals, Celsius had a substantial portion of assets under management, worth approximately $12 billion. The firm now only has $167 million in cash on hand, which it says “will provide ample liquidity to support certain operations during the restructuring process.”
What Caused Celsius to Go Bankrupt?
Similarly to 3AC, liquidity problems at Celsius have been caused by the disastrous state of the market. The implosion of LUNA and UST earlier this year damaged consumer confidence in the crypto market. Many believe that the LUNA saga accelerated the onset of the crypto winter we are currently witnessing.
Celsius further states that it filed for voluntary bankruptcy “to provide the Company with the opportunity to stabilise its business and consummate a comprehensive restructuring transaction that maximises value for all stakeholders.”
Court filings reveal that Celsius has a $1.3 billion hole in its balance sheet. This is the first time Celsius has acknowledged the hole in its balance sheet.
The company’s bankruptcy filing shows that Celsius also has more than 100,000 creditors, all of which will be eager to get their hands on their money.
The Founders of Celsius
Celsius was co-founded by Alex Mashinsky and S. Daniel Leon. The pair drew up the idea for Celsius on a coffee shop napkin in 2017. Unlike 3ACs founders, Mashinsky and Leon have not gone into hiding.
“This is the right decision for our community and company,” Said chief executive and co-founder of Celsius, Alex Mashinsky. “We have a strong and experienced team in place to lead Celsius through this process.”
The crisis at 3AC, Celsius, and other firms may force regulators to crackdown on crypto lending. The financial watchdogs may target crypto lenders when they are at their most vulnerable, in an attempt to bring some regulation to the crypto industry as a whole.
What Does this Mean for Customers?
Truth be told, always read the fine print. Celsius’ terms and conditions suggest in the event of bankruptcy, customer funds may not be recoverable. “Any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable”. The T&Cs further state that customers “may not have any legal remedies or rights in connection with Celsius’ obligations.”
It appears that the firm was attempting to shield themselves from any legal wrongdoing, should the firm ever go bankrupt. What will happen next? Only time will tell.
The Current State of The Crypto Market
A little over 6 months ago, the crypto market was in full swing, with Bitcoin reaching new All-Time-Highs (ATHs). Fast forward to today: most cryptocurrencies are trading roughly 80% below those ATHs. The bear market remains in full force.
The crypto market is struggling to regain composure as Bitcoin continues to stagger around the $20K level.
Experts are holding thumbs that the market will recover sooner rather than later. We are, however, facing some uncertain times. The war in Ukraine, high inflation rates, and global monetary policy continue to cause harm towards the global markets. This no doubt intensified the recent collapse of the market. Additionally, fear in the crypto market is thriving, as over-leveraged crypto firms are slowly but surely being exposed.
While we remain optimistic, there’s no telling when the market will recover. Don’t be alarmed though: bearish markets are a normal part of investment cycles. We will likely see some sort of recovery in the coming months. The best thing you can do is sit back and watch the markets.
The Future Outlook
While the future of 3AC, Celsius and others remain uncertain, we believe that Decentralized Finance (DeFi) and crypto industry certainly has a bright future ahead once the current market cycle changes direction.
If, however, this bear market has taught us anything, it’s that people should always be careful when utilising crypto loan services. This bear market has seen various crypto lenders go under, taking their customers down with them. That being said, crypto loans can be a quick, inexpensive, way to obtain a loan and often don’t require a credit check.
Before you engage in crypto lending or trading, it’s important to understand the risk involved.
At RR² Capital, we’re a pioneering Venture Capital (VC) firm empowering the ‘new internet’. To date, we’ve successfully invested in over 140 projects. Our mission is to capture value by investing in early stage projects and teams who are leading innovation and disruption within the Web 3.0 world.
For more information about RR² Capital and our expansive disruptive technology-focussed investment portfolio, visit our website here or send us a mail here.
