Notes 6/29: Three Arrows Capital Liquidation, Bitcoin Miners Losses, Saylor Buys More Bitcoin

Another one bites the dust.

Embattled crypto hedge fund Three Arrows Capital has been ordered to liquidate its holdings by a court in British Virgin Islands. The order brings to the story that began a week ago, after Celsius’s pause on withdrawals, to a rapid end.  

Three Arrows Capital or 3AC seems to have had exposure or interfaced with most scandals afflicting the crypto ecosystem today. That list includes Voyager Digital, Celsius, Terra’s stablecoin UST, and BlockFi.

That was not the only extent of its involvement with them. The firm, apparently, was also behind the fantastic yields of between 15% to 20% offered by retail-facing crypto lending companies.

While some are calling it the “biggest deleveraging event” in crypto, we will probably know little about its impact on the cryptocurrency ecosystem. It was supposed to be a prominent trader in crypto markets and investor in many tokens.

But most reporting about 3AC seems to have been based on official statements or hearsay. “We don’t even know whether 3AC has been truthful about its balance sheet,” said one of the guests on a podcast at online publication The Block. The firm’s total assets under management (AUM) was “rumored” to be $20 billion, at one point of time.

Perhaps, 3AC’s liquidation process might shine a light on the next casualty this crypto winter. Or, considering crypto’s shuttered doors, maybe not.

Bitcoin Miners Drive Prices Down

The slump in bitcoin prices is also affecting the cryptocurrency’s miners. A Bloomberg article yesterday discussed the effect of bitcoin’s price slump on its mining industry. Typically, miners hold onto their stash of mined bitcoin and sell them at opportune moments for profit to cover operational costs. Bitcoin’s volatile prices help make a quick trade for miners to recoup production costs and pay off loans they might have taken to scale their mining facilities.

The Bloomberg article states that the current prolonged slump in Bitcoin prices means that they are selling off more than their regular number of tokens to cover costs and service margin calls on their loans from lending firms. This action contributes to further downward pressure on prices. Not only that the prices of mining rigs, which are used a collateral for loans, are also falling because many lending institutions may be forced to liquidate them at cheap prices to pre-empt losses to their loan books. The list of lending institutions for miners includes BlockFi and Celsius, two firms that have been in the news recently for their financial problems.  

If liquidations do occur, will they reduce the number of miners in bitcoin?

The prospect is likely but it will not be the first time that miners will have deserted its mining ecosystem. Given crypto’s erratic price swings, miners tend to switch between cryptocurrencies that offer the maximum potential for profits at a given time. Small outfits have become insolvent during crypto winters while big operations with scale have survived the freeze.  

Bitcoin’s hash rate, or the total computing power devoted to mining the cryptocurrency, has been on a rising curve since last June. It fell briefly earlier this month but is in recovery mode. Hash rate is not indicative of the number of miners in bitcoin’s network because large miners tend to dominate its ecosystem. Bitcoin remains a profit center for them. The Bloomberg piece quotes an analyst who estimates that the cost of bitcoin production for a large company is $8,000 per token. The cryptocurrency’s current price range of around $20,000 means that they have a comfortable cushion.   

Big mining firms with scale survived previous downturns in bitcoin’s price. My guess is the same will happen again.       

Michael Saylor Buys More Bitcoin

Bitcoin price fell below $20,000 briefly this morning. But that didn’t seem to bother MicroStrategy’s Michael Saylor. He tweeted this morning that his firm has bought 480 bitcoin for roughly $10 million. The firm, which has become a bitcoin play more than a business, holds roughly $3.98 billion worth of bitcoin that it purchased for an average price of $30,664. He may have more buying opportunities over the July 4th weekend.

The team at investment firm Bitwise Investments told its investors that this weekend or the beginning of next week might be volatile for bitcoin’s price. “The fundamentals of crypto remain strong,” said Matt Hougan, chief investment officer at the firm. But, he said, there are many “significant risks”, particularly related to deleveraging, in its ecosystem. The form this deleveraging might take in the coming days is not yet clear. What is clear, however, is that bitcoin price will go lower and bottom out in the coming days.

As of this writing, bitcoin price is $20,336.79, roughly unchanged since yesterday.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.