Research Report

Three Arrows Capital (3AC) Insolvency Crisis: Is A Major Catastrophe In Store For Cryptocurrencies?

Author: Elena R

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Elena is an expert in technical analysis and risk management in cryptocurrency market. She has 10+year experience in writing - accordingly she is avid journalists with a passion towards researching new insights coming into crypto erena.

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The cryptosphere continues to be engulfed by darkness. The havoc created by factors like global recession and the crisis of giants such as Celsius and Three Arrows Capital (3AC) has left the crypto industry with losses accounting for billions. Putting things into perspective, over $200 Million has been liquidated from the market since the previous day. 

That said, over $1 Trillion has wooshed from the market since the start of the quarter. Successively, the market capitalisation of the broader industry has lost the threshold at a trillion dollars. The numbers at the time of press are at $905.08 B

Conversely, 3AC – one of the largest crypto hedge fund companies is on the verge of insolvency- and is a matter of concern for the masses. But what led to the fall of the industry giant, and what will the consequences be for the crypto business? Buckle up as this write-up will get your queries sorted. 

What Is Three Arrows Capital (3AC)?

  Three Arrows Capital, better known to the masses as 3AC, is one of the world’s largest crypto-focused venture capital firms. The crypto hedge fund managing company provides returns adjusted for risks. 3AC was founded in 2012 by Zhu Su and Kyle Davies in Singapore. 

The firm has recently moved its base to Dubai and is last known to be managing funds worth $18 Billion. Three Arrows Capital’s finest investments include AVAX, NEAR, AAVE, LUNA, and AXS. The market capitalization of the said cryptocurrencies collectively makes up $8.88 Billion

The VC firm had made notable moves in the bygone year, which had left a significant impact on the industry. The notable initiatives include the firm’s $1.2 B+ position in Grayscale’s GBTC and a million-dollar investment in DeFi’s dydx amongst others. On the other hand, the pictorial representation shared by Crypto Quant CEO Ki Young Ju illustrates the portfolio of 3AC. 

Where Did Things Start Going Wrong?

 The firm and the makers have been facing criticism for quite some time. Co-founder Zhu Su is an influential personality on the web, with over half a million followers on Twitter. Netizens allege Zhu to have played mind games for his own profit. 

On the 21st of November, 2021, the capitalist took to Twitter, citing that he had abandoned Ethereum because it failed to adhere to its vision. Naturally, this resulted in the ETH price plummeting. But, by the 8th of December 2021, the news of 3AC acquiring $660 M worth of ETH made it to the headlines. 

Conversely, before the fall of Terra, 3AC had spent close to $560 Million to buy locked LUNA, which is now worth a mere ~$670. There have been speculations that the enormous losses incurred have compelled them to increase leverage to square off the losses.

Three Arrows Capital Fails To Meet Margin Calls!

  Although Three Arrows Capital holds commendable investments in cryptocurrencies, a sizable count of tokens are locked for years. As a result, the firm has failed to meet lender margin calls, which is a dilemma for any hedge fund. The result brought a sharp fall in the prices of Bitcoin, Ethereum, and other cryptocurrencies. 

A proponent from the industry claims that 3AC borrows funds from every significant lender like BlockFi, Genesis, Nexo, and Celsius, amongst others. The firm’s collapse will transfer the economic risks to its lenders, who would bear the principal difference between how much they owe and what they receive for liquidating their collateral. 

The lenders are said to have tightened how much credit is on offer following the turbulence. BlockFi is among the lenders that liquidated a notable count of 3AC’s positions. 

If the lenders are ill-prepared, the defaults will cause significant erosion of equity. As a result, lenders will guard themselves by withdrawing credit from the business. Putting things into perspective, the fall of the blue-chip hedge fund and a primary lender will shrink the overall credit in the business and make way for continued deleveraging. 

Cryptocurrencies Now Await For A Catastrophe!

  With the possibility of billions in credit being destroyed, the crypto market would sink drastically. The extent of damage is hard to gauge, as there is an absence of details around 3AC’s wallets and positions. However, the size of the VC will result in a rippling effect that could be catastrophic for cryptocurrencies. 

The following are some of 3AC’s primary holdings, which they could dump. The notable ones are BTC, ETH, AVAX, AAVE, NEAR, SOL, DOT, and Terra. That said, the key cryptos BTC and ETH will be the first to bear the brunt as these are the ones friendlier to liquidate. The pictorial representation shared by investor Miles Deutscher better briefs on the holdings of the firm. 

What Will The Exit Plan Be?

 According to insider buzz, Deribit, FTX, and BitMEX have liquidated Three Arrow Capital’s positions. That said, the venture capitalist company reportedly owes BitMEX around $6 Million. With debt in jaw-dropping numbers and negative criticism, the team behind 3AC have been burning the midnight oil. 

The team from Three Arrows Capital (3AC), have confirmed about the heavy losses this Friday. The makers have claimed that they have hired legal and financial advisors for future proceedings. And that they are exploring strategies for revival, which include the sale of assets and a rescue operation by another firm. 

Wrapping Up!

Summing up, holding a big bag of LUNA has costed Three Arrows Capital, a big sum. The historic dump and manipulations of LUNA, have had consequences on other crypto assets, most of which are held by the firm. That alongside excessive leveraging has resulted in it getting margin called and liquidated. That said, the situation would only worsen until big-money players extend their help.

Talking about the broader market, BTC and ETH have been struggling to rise above the $21k and $1.1k barriers. The sale of assets is only going to aggravate the prices, and probably BTC at $18k is not far from sight. With the mushrooming count of firms heading towards insolvency. The industry’s $1 Trillion market capitalization would remain far from reach. 

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Elena R

Elena is an expert in technical analysis and risk management in cryptocurrency market. She has 10+year experience in writing - accordingly she is avid journalists with a passion towards researching new insights coming into crypto erena.

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