The Voyager Digital and Three Arrows Capital Collapse
One crypto hedge fund’s collapse in 2022 didn’t just wipe out its own investors , it pulled down a chain of lenders who had trusted it with billions of dollars in loans.
What Happened to Three Arrows Capital?
Three Arrows Capital, known as 3AC, was a prominent crypto hedge fund that collapsed in mid-2022 after suffering massive losses tied heavily to the Terra/LUNA collapse and other highly leveraged positions across the crypto market downturn. The fund was ordered into liquidation in the British Virgin Islands in June 2022, with founders reportedly becoming difficult to locate as creditors sought repayment.
3AC had borrowed extensively from numerous crypto lending platforms and trading firms, using that borrowed capital to take large, leveraged positions across various crypto assets and projects , a strategy that generated strong returns during bull market conditions but left the fund catastrophically exposed once the market turned sharply against it.
How Did This Bring Down Voyager Digital?
Voyager Digital, a crypto lending and trading platform, had lent a substantial sum, reportedly around $650 million worth of crypto, to Three Arrows Capital. When 3AC collapsed and defaulted on its obligations, Voyager found itself with a massive hole in its balance sheet that it could not cover, forcing the company to suspend trading, deposits, and withdrawals before filing for bankruptcy in July 2022.
Voyager’s collapse demonstrated a critical vulnerability in the crypto lending ecosystem: platforms that lent customer deposits to a small number of large institutional borrowers were exposed to concentrated counterparty risk, meaning a single large borrower’s failure could cascade directly into customer losses.
What Was the Broader Contagion Effect?
The 3AC and Voyager collapses were part of a wider chain reaction across crypto lending and trading firms in mid-to-late 2022, with numerous other companies revealing exposure to 3AC’s defaulted loans or facing their own liquidity crises as the broader market downturn continued. This period is widely referred to as part of the 2022 crypto contagion, illustrating how interconnected lending relationships between crypto firms could transmit a single fund’s failure across the wider industry.
Timeline of the 2022 Contagion
- May 2022: Terra/LUNA collapses, inflicting massive losses on funds and platforms with exposure, including Three Arrows Capital.
- June 2022: Three Arrows Capital defaults on loans and is ordered into liquidation.
- July 2022: Voyager Digital, exposed to 3AC’s default, suspends operations and files for bankruptcy.
- Following months: Additional firms with 3AC or Voyager exposure face their own financial distress, extending the contagion further across the industry.
Frequently Asked Questions
Did Voyager Digital customers recover their funds?
Customers recovered a portion of their deposits through the bankruptcy process, though the exact amount and timeline varied and the resolution took considerable time.
What caused Three Arrows Capital’s collapse specifically?
Heavy losses tied to leveraged positions and exposure to the Terra/LUNA collapse left the fund unable to meet its obligations once the broader market turned sharply downward.
How is counterparty concentration risk different from general market risk?
Market risk affects asset prices broadly, while counterparty concentration risk specifically involves losses from relying too heavily on a single borrower or lending partner who then defaults.
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Disclaimer: The content provided on this page is for informational and educational purposes only and does not constitute financial or investment advice. Cryptocurrency markets are highly volatile and involve significant risk of loss. Always do your own research and consult a licensed financial advisor before making any investment decisions.