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Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

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Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#11

Post by WJW »

polynomial wrote: post #5
chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.

Say you have 100 USD, but want to make a bigger bet on crypto than that. You borrow another 900 USD from a crypto lender and invest the 1000 USD in some cryptocurrency. If the currency you invested in goes down by 10%, your original position of 1000 USD will be worth 900 USD, and you will still owe the lender 900 USD so your original 100 USD stake has been lost completely. The lender will then protect their loan by forcing you to sell the 900 USD in crypto that you still have and repaying the loan. This is in itself not unique to crypto (google the term "margin call" if you want to know more), but crypto is usually more automated about it and exchanges will sell positions without manual intervention. This sell pressure can push the coin even lower, leading to a chain reaction of liquidated positions.

Often, the lender is also the exchange through which people hold their crypto so they don't even have to contact the holder before they sell their holdings.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#12

Post by blitzar »

polynomial wrote: post #5
chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.

DeFi - Contracts are code.

TradFi - Your word is your bond.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#13

Post by junofan »

chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#14

Post by archerabi »

polynomial wrote: post #5
chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.

Here's a concrete example. AAVE is a protocol that allows lenders to lend money to borrowers in a decentralized manner.

So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/

AAVE currently has ~$9.9B in assets locked into its protocol.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#15

Post by charles_kaw »

junofan wrote: post #13
chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.

> I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.

Because they don't. Because it's a wild west. TradFi has it's failures as well - but that's "whataboutism".

DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#16

Post by djbebs »

archerabi wrote: post #14
polynomial wrote: post #5

Earlier quoted context omitted.

Can you explain what you mean by crypto's forced liquidation rules? Not familiar with how that works at all.

Here's a concrete example. AAVE is a protocol that allows lenders to lend money to borrowers in a decentralized manner. So as a borrower, today, if you were to borrower 8000 USDC and deposit 10 ETH as collateral, the AAVE protocol would automatically sell your collateral if the ETH price went to 941$. So your position is "auto liquidated". https://aavecalculator.com/ AAVE currently has ~$9.9B in assets locked into it…

That no different from any margin loan

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#17

Post by rr888 »

junofan wrote: post #13
chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.

LTCM was bailed out with government (Fed) coordination. Archegos was only survivable because it was in a huge bull market and the losses were just a few billions dollars which was possible to be absorbed by the big banks.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#18

Post by dcolkitt »

chollida1 wrote: post #2

The crypto community continues to speed run the history of traditional finance. This weeks lesson is that in an up market its leverage that makes you money and in a down market its the unwinding of leverage that kills you. They are also learning that interconnectedness will hurt more in a downturn. You can be perfectly delta hedged( don't care which way the market moves) and its the counter party risk that will sink…

> Crypto has tried to solve this by strict liquidation rules that tend to make things worse by turning firms into forced sellers

This is literally how traditional finance works as well. If you have a leveraged position at a futures or options exchange, you absolutely will be liquidated as soon as your position gets close to being in the red. I 100% guarantee you that the CME or Goldman will not let you "ride things out".

You don't have to take my word for this. Look up the history of what happened to the energy hedge fund Amaranth.

Re: Battered Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout

#20

Post by logicchains »

charles_kaw wrote: post #15
junofan wrote: post #13

Earlier quoted context omitted.

A nice narrative that falls apart when you remember LTCM, Archegos, etc. I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe.

> I don’t understand why you think crypto funds don’t arrange the same kind of “oversite” you describe. Because they don't. Because it's a wild west. TradFi has it's failures as well - but that's "whataboutism". DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.

>DeFi is collapsing in real time and we'll probably see oversight and regulation around this in the near future.

From the perspective of people who support the mission of DeFi and aren't just in it for the money, this is a feature, not a bug. We want these dodgy, extractive institutions to go under and not have to bail them out.

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