Following a drastic market slump, crypto hedge fund Three Arrows is facing widespread liquidation, which could reduce the firm’s holdings.
Three Arrows’ future difficulties have sparked speculation after founder Zhu Su claimed on Twitter that the company is “communicating with relevant parties” and “working this out.”
The fund was witnessed selling millions of Lido Staked Ethereum (stETH) in various transactions to avoid having its positions liquidated.
Its exposure to the Terra crash, Celsius, and stETH has also generated concerns about its financial situation.
Three Arrows at liquidation risk as stETH prices drop
Three Arrows is aggressively posting collateral to decrease its liquidation threshold, according to on-chain data. Crypto commentator @OnChainWizard, points out that if Ethereum prices hit $1,042, the business risks a $264 million liquidation on Aave.
Ethereum is currently trading at $1,122.86. However, following the Federal Reserve’s interest rate hike, crypto markets are predicted to witness more declines later in the day.
In conjunction with founder Su’s comments, a report from The Block claims that the company is in talks with its lenders about getting more liquidity and avoiding liquidation.
Three Arrows is one of the biggest stETH holders, which is also the source of its problems. The token, which is supposed to trade at a 1:1 ratio to ETH, depegged last week after another significant investor, Alameda Research, dumped its holdings.
Both Three Arrows and Celsius used stETH as collateral to borrow ETH. The reduction in stETH prices now puts them at risk of being liquidated.
Ethereum prices will decline if liquidation takes place
If Three Arrows’ $242 million ETH position is liquidated, the company will be compelled to dump its holdings in the open market. This will make the token lose even more value.
ETH is already under selling pressure because of the stETH depegging. This has extended to several DeFi platforms, potentially causing a chain of market liquidations.
Celsius would also sell some of its positions if ETH falls below $1000, a scenario that could happen after today’s Fed rate hike.