Voyager calls time on Three Arrows as crypto fund teeters on the brink

From the editor’s desk

Dear Reader,

The current market turbulence in the digital asset space has prompted some colorful language among investors and industry watchers, but in recent days a number of utterances heard less frequently in the sector have entered common usage. Terms such as “distressed assets,” “margin call” and “bailout” are now very much part of the conversation.

This is the language of traditional finance, not an everyday part of the crypto vernacular. Yet here we are, discussing the fortunes of the digital asset industry in precisely these terms.

In a way, it should come as no surprise, given the increasingly well-established correlation between the crypto segment of the digital asset sector and traditional financial markets. It’s hard to avoid concluding that — not least amid the influx of TradFi-speak — the crypto market, in a fairly fundamental way, is starting to look a lot like a traditional equity market.

This has a number of implications. The first and most reassuring of these is that it suggests crypto is here to stay. Traditional markets go through booms and busts, yet they don’t disappear altogether.

A second is that the industry is maturing. It’s well understood that emerging sectors go through growing pains and that shakeouts are a feature. The dot-com crash two decades ago still stands as the most vivid recent illustration of this: Its frothy exuberance claimed many casualties, but some of the world’s most successful enterprises emerged from it.

Add to that the fact that traditional finance sector businesses, including some of the biggest names on Wall Street, are not retreating from the digital asset space but pushing further into it — a clear sign that the sector retains ample appeal in the world of grown-up finance. Why else would Goldman Sachs be building a US$2 billion fund to acquire the assets of distressed crypto lender Celsius?

Third — and related to both the industry shakeout and increased TradFi engagement — is that greater market concentration among industry players and of ownership of assets may be in the works. Crypto exchange FTX, for instance, is in a tussle with investment firm Morgan Creek Capital Management to acquire a majority stake in troubled crypto lender BlockFi. Crypto-utopians won’t like such accumulations of market power, but they’re hardwired into capitalism, of which the digital asset industry is very much a part.

And finally, given the likely persistence of the correlation between crypto and traditional markets, the current moment may present an opportunity for investors with focused minds and strong stomachs. The bolder among them are, perhaps, recalling another lesson from the dot-com crash: Among all the ventures that failed, the next Google or Amazon may well be gestating.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast

Forkast.Insights | What does it mean?

Crypto companies and their lightning-fast growth had been expected to eat into the profit margins of traditional finance firms. Yet today, the opposite is happening. While Voyager struggles to recoup its losses, hedge funds have been quietly making a killing out of betting against it and the wider markets. 

Quant hedge fund firms, which rely on computer algorithms to try to predict market movements, are compounding the problems of businesses such as Three Arrows and projects such as Voyager by shorting the very assets those projects depend on. 

Firms like KPTL Arbitrage Management and Systematica Investments have made double-digit gains in crypto, while other fund managers are struggling to recover losses amid the market rout. 

This is creating headaches for crypto companies trying to pay off debt. Increased downward pressure on crypto prices, paired with spooked investors trying to extract cash amid fears of company collapses, is creating the perfect environment for short sellers, and projects such as Voyager are caught in the melee. 

With central banks unmoved by the market’s travails, there is no safety net for investors right now.

Forkast.Insights | What does it mean?

“Nothing important has ever been built without irrational exuberance,” venture capitalist Fred Wilson of Union Square Ventures wrote of the dot-com crash of two decades ago in the 2015 book “Boom & Bust: A Look at Economic Bubbles.”  

The bloodbath on crypto markets and the ensuing tut-tutting from the broader financial sector share similarities with Wilson’s commentary on the dawn of Web 2.0. 

Back then, tech companies thrived, thanks to cheap credit and an investor community hungry to capitalize on the new asset class. The U.S. Federal Reserve was less than pleased about the sudden rise of profitless companies and an overheating economy, and it raised interest rates three times in a single year. 

Internet companies became distressed, allegations of fraud and misappropriations of funds abounded, and within two years the tech sector had lost US$5 trillion in market capitalization since its peak. Sound familiar?

That’s because crypto, like tech 20 years ago, is still in its formative stages. Blaming crypto companies for their instability speaks to a misunderstanding of why digital assets have become incredibly popular. Crypto thrives in mismanaged economies — witness crypto adoption rates in Turkey, Lebanon and Brazil, for instance. Digital assets were created as an antidote to traditional finance, not a complement to it. If financial services have high costs and barriers to entry, crypto represents the opposite. 

Regulation is required to help prevent further collapses. But the ideas currently being explored in the digital asset space — as in tech in the noughties — will give birth to companies and industries that will define the next generation of the web. They just need time.

Forkast.Insights | What does it mean?

Chinese regulators have yet to establish clear rules for digital collectibles in the country, which has upset many in the industry as it makes it hard to run NFT-related businesses.

Tencent-owned social media giant WeChat — a major communications and community-building tool for NFT projects in China — is following prevailing and oft-expressed sentiment that Chinese regulators will probably not tolerate the flipping of NFTs, and they are already censoring content related to NFT trading.

But digital collectibles are still being traded in China. A Beijing-based lawyer told Forkast that Yucang’s decision to repurchase assets might not be the most legally prudent course if it amounts to running a secondary marketplace, which could spark concerns over whether repurchasing constitutes a form of guaranteed break-even investment, which could fall foul of regulators.

Analysts from multiple Chinese securities firms are suggesting in recent research notes that “de-financialization” may be a key regulatory approach when it comes to China’s NFT market. Caitong Securities analysts said in a report on Sunday that the hype around digital collectibles might be dying down, as some items released last week on tech giants’ platforms, including Tencent’s Huanhe, had not immediately sold out as other NFTs had in the past.

As regulatory uncertainty persists and the fallout of China’s Covid lockdowns continues to linger, a number of Web 3.0 companies are already leaving the country for jurisdictions that have clearer and friendlier regulatory frameworks toward digital assets, Forkast has learned. China will need to act quickly to get facilitative regulation in place if it wants to make a mark on the evolution of Web 3.0, let alone set any kind of agenda in the space.