Crypto hedge fund Three Arrows faces mass liquidation after a sharp market downturn- one that could potentially erode the firm’s holdings.
Speculation over further woes for Three Arrows comes after founder Zhu Su said on Twitter that the firm is “communicating with relevant parties” and committed to “working this out.”
The fund was seen selling millions of Lido Staked Ethereum (stETH) through multiple transactions to keep its positions from being liquidated.
Its exposure to the Terra crash, Celsius and stETH has also raised questions over the state of its finances.
Three Arrows is trying to cover its positions
On-chain data shows that Three Arrows is aggressively posting collateral to lower its liquidation threshold. Crypto commentator @OnChainWizard notes that the firm faces a $264 million liquidation on Aave if Ethereum prices hit $1,042.
Ethereum is currently trading at $1,122.86. But crypto markets are likely set to see further declines later in the day, after an interest rate hike by the Federal Reserve.
In conjunction with founder Su’s comments, a report from The Block suggests that the firm is in negotiations with its lenders over gaining more liquidity and avoiding liquidations.
Three Arrows is one of the largest holders of stETH- which is also the source of its woes. The token, which is expected to trade at a 1:1 ratio to ETH, had depegged last week after Alameda Research- another major holder- dumped its stake in the token.
Both Three Arrows and Celsius had collateralized stETH to borrow ETH. The drop in stETH prices now exposes them to a potential liquidation.
Liquidation to dent Ethereum prices
If Three Arrows’ $242 million ETH position were to be liquidated, the firm would be forced to dump its holding in the open market, causing further weakness in the token.
ETH is already struggling against selling pressure caused by the stETH depegging. This has spread to several DeFi platforms, and could cause a chain of liquidations across the market.
Celsius will also see some of its positions liquidated in the event of ETH falling below $1000- a scenario that may play out after the Fed rate hike today.
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