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The crypto industry was “brought to its knees” in recent weeks by an “old-fashioned Madoff-style Ponzi scheme” wrapped in a trade that was similar to the positions that sunk Long Term Capital Management (LTCM),” research firm FSInsight said in a report Friday that looked at the implications of the implosion of crypto hedge fund Three Arrows Capital, which is also known as 3AC.

Madoff in this scenario would be the founders of 3AC, Su Zhu and Kyle Davies, who used their reputation to “recklessly borrow from just about every institutional lender in the business,” resulting in pain for some high-profile firms in the industry, including Voyager Digital, Babel Finance and BlockFi, Sean Farrell, head of digital asset strategy at FSInsight, wrote in the report. Bernie Madoff was an American financier who ran the largest Ponzi scheme in U.S. history.

At its peak, 3AC had supposed assets under management (AUM) of over $18 billion, the note said. But given that the amount of debt that is now known to have been loaned to the firm, it is unclear how much actual equity was at risk. It is likely that Zhu and Davies were simply “using borrowed funds to repay interest on loans issued by lenders, while ‘cooking their books’ to show massive returns on capital,” the note added.

Read more: 'Staked Ether' Becomes Focus of Crypto Stress, From Celsius to Three Arrows

Given the size of the exposure that companies like Voyager Digital and BlockFi had to the fund, it appears that the vast majority of 3AC’s assets were bought with debt and its collateralization ratio was quite small, according to Farrell.

“The macro conditions preceded destruction in global asset prices, reducing the collateral value of any crypto asset, and 3AC was heavily invested in LUNA/UST, which couldn't have helped the situation, however, we think the downward spiral started with 3AC’s overleveraged bet on Grayscale Bitcoin Trust (GBTC),” the note stated.

(Grayscale’s parent company is Digital Currency Group, which also owns CoinDesk).

The GBTC trade was highly leveraged, and when the premium-arb trade disappeared, 3AC was still likely locked in GBTC, FSInsight said. Instead of exiting at a small loss, however, 3AC likely doubled down on the trade, expecting the discount to converge to net asset value once the spot exchange-traded fund was approved, Farrell added. Grayscale has applied to the U.S. Securities and Exchange Commission for approval to convert the trust to an ETF. GBTC's share price has been trading at a discount to its net asset value.

FSInsight says the GBTC trade will eventually pay off for patient investors, but the timing is unclear, as the spot ETF might be approved in weeks, but could also take years.

Read more: With Bitwise and Grayscale Decisions Looming, Spot Bitcoin ETF Approval Hopes Are Running Low

‘Deep value’

As asset prices collapsed and margin calls were triggered, 3AC could no longer hold its “daisy chain of leverage together,” which caused illiquidity issues across the whole crypto lending market, the report said. The overleveraged nature of this arbitrage trade is similar to the types of trades that were the “death knell” for Long Term Capital Management, the report added.

Recent data shows capitulation among bitcoin holders, FSInsight, said, but there remains a risk that growing miner positions could be a source of further selling pressure. While the short-term picture for digital asset prices remains “treacherous”, the market has reached an area of deep value for bitcoin (BTC) that long-term investors should take advantage of, it added.

Read more: Opaque Platforms and Intertwined Protocols Pose Big Risk to Crypto