What happened
Cryptocurrencies are having another rough day on Tuesday as investors worry about the risk profile of digital assets at a time when one of the biggest funds in the crypto industry is being unwound.
As of 2 p.m. ET, Bitcoin (BTC -2.52%) was down 3.6% in the prior 24 hours and fell by 5.6% from its high to its low in that time. Ethereum (ETH 1.17%) was down 6.7% and had a max decline of 8.9%. Dogecoin (DOGE -4.83%) was off by 4.3% and had a peak decline of 6.5%.
So what
The Three Arrows Capital saga continues, and it's getting stranger by the day. The crypto hedge fund has been ordered to liquidate and has filed for bankruptcy in the U.S., but even its lawyers don't know where its co-founders, Zhu Su and Kyle Davies, are right now.
Creditors and liquidators are looking for cooperation from the founders, who reportedly had as much as $10 billion in assets under management just a few months ago. But the collapse of TerraUSD pushed the company to a breaking point, and when cryptocurrencies like Bitcoin and Ethereum dropped, it could no longer survive.
What the market is worried about is that the collapse and liquidation of Three Arrows Capital could cause a domino effect of collapses across the industry, similar to what happened when Terra Luna imploded. The failure of those tokens suddenly revealed huge leveraged positions across the crypto market.
Now what
The perceived balance between risk and reward keeps swinging in the crypto market, and right now traders and investors are seeing more risk than they're willing to take. What we don't know is just how big Three Arrows Capital's positions are, or what the impact on the market will be if they're sold off. If, for example, the company had a big loan that was backed by Bitcoin, when the loan is paid off, the Bitcoin would be returned, but then it would be sold by liquidators. This could cause the sell-off to continue.
Markets and traders don't like uncertainty, which helps explain why the crypto market has been so volatile for the last few weeks. Extreme risk has been uncovered, and if Three Arrows Capital is hiding even more risk, then we can expect further selling and downward pressure ahead.
I don't think Tuesday's token price drops are a reason to change your investment thesis about any cryptocurrency, but understand that there will likely be more big moves ahead. Courts could be battling for months to unwind Three Arrows Capital, and it was one of the biggest individual asset owners in the crypto industry. With an unwinding that big, a period of higher volatility is the only certainty for crypto.
