Why Bitcoin, Ethereum and Dogecoin collapsed yesterday

Cryptocurrencies are having another tough day on Tuesday as investors worry about the risk profile of digital assets at a time when one of the largest funds in the cryptocurrency industry is liquidated. 

By 14pm ET, Bitcoin was down 00% in the previous 3,6 hours and lost 24% from its high to its low. Ethereum fell 5,6% and recorded a maximum decline of 6,7%. Dogecoin fell 8,9% and recorded a maximum decline of 4,3%. 

Three Arrows Capital was ordered to liquidate

The Three Arrows Capital saga continues, and gets weirder every day. The cryptocurrency hedge fund has been liquidated and filed for bankruptcy in the United States, but not even its lawyers know where its co-founders, Zhu Su and Kyle Davies, are now.

Creditors and liquidators are seeking collaboration from the founders, who reportedly had $ 10 billion under management until a few months ago. But the collapse of TerraUSD pushed the company to a breaking point and, when cryptocurrencies like Bitcoin and Ethereum collapsed, it could no longer survive. 

What worries the market 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 cryptocurrency market. 

A market that is still very uncertain

The perceived balance between risk and reward continues to fluctuate in the cryptocurrency market and right now traders and investors are seeing more risk than they are willing to take. We do not know how large Three Arrows Capital's positions are and what the impact on the market will be in case of a sale. If, for example, the company had a large loan backed by Bitcoin, when the loan is paid off, the Bitcoin would be returned, but then it would be sold by the liquidators. This could result in a further sell-off, which is still profitable if you use trading platforms such as Bitcoin system.

Markets and traders dislike uncertainty and this explains why the cryptocurrency market has been so volatile in the past few weeks. Extreme risk has been discovered and if Three Arrows Capital is hiding even greater risk, we can expect further selling and downward pressure. 

I don't think Tuesday's drop in token prices is a reason to change your investment thesis on any cryptocurrency, but it's good to understand that there will likely be more big moves in the future. Courts could struggle for months to liquidate Three Arrows Capital, which was one of the largest owners of individual assets in the cryptocurrency industry. With such a large liquidation, a period of increased volatility is the only certainty for cryptocurrencies.