World Largest Crypto VC Burned Around $18 Billion and Now Facing Bankruptcy
The Ultimate Article on what leads to the downfall of 3AC
- Three Arrows Capital (3AC) is a crypto venture capital fund, led by @zhusu and @KyleLDavies.
- At their peak they were managing an estimated $18b in assets, ranking them in the top 3 VCs in the space.
- Some of their most successful investments include $AVAX, $NEAR, and $ETH.
- 3/ Unfortunately, a mix of poor risk management, greed, and recklessness has led to insolvency which has severe ramifications for the entire space.
How the Downfall Started?
- It all started when @zhusu deleted his Instagram and went radio silent on Twitter, causing rumors to spread about a potential 3AC margin call.
- Shortly after, it was revealed that 3AC had $245m of $ETH deposited in @AaveAave, which they used as collateral to borrow $189m.
- Due to their illiquidity (many tokens were locked), they were unable to add collateral or pay off debt.
- This led to a liquidation cascade.
- Many began to label their overuse of leverage as “irresponsible”, as many positions were left exposed when the market started dropping.
- Things started to get worse.
- It was revealed that 3AC was “leveraged long everywhere”, resulting in a flurry of margin calls. Instead of answering these calls, they ghosted everyone, resulting in forced liquidations (leading to a broader market dump).
- It became evident that liquidity issues were worsening, as 3AC were seemingly forced to sell over 60k $stETH.
- The beginning of 3AC’s woes can be directly tied back to the collapse of $LUNA and $UST.
- • 3AC supposedly borrowed money off investors and deposited into Anchor (without informing them)
• Bought $560m worth of locked $LUNA
• That position then collapsed to a mere $600
- 3AC allegedly used counter-party funds to build a 9-figure $UST position in Anchor protocol, unbeknownst to its creditors prior to the collapse.
- There’s speculation that these losses led 3AC to increase their appetite for leverage, as a form of “chasing losses.”
- Like many investors, VCs and asset managers like 3AC and Celsius got overconfident in the heat of the bull market.
- We see this a lot in poker, regarded as being “pot stuck.”
- When “effort or money already spent is causing you to stay around even though it’s a losing proposition.”
- They kept putting money into the pot to recoup previous losses, resulting in exponentially increasing risk.
- As @VinnyLingham pointed out: In crypto, you’re already taking on significant risk as it is. Why add leverage and further compound said risk?
- I think in the case of 3AC it’s clear: Greed.
- So why does 3AC’s insolvency spell disaster for crypto?
- Because they borrow from almost every major lender. FTX, Celsius, BlockFi, Nexo, and BitMex to name a few.
- If 3AC is unable to repay loans, all lenders inevitably take a hit. This kicks off somewhat of a domino effect. Unfortunately, the sheer size of 3AC’s loans spells more trouble than your typical borrower.
- If you take a $100k loan from a lender, you’re f*cked. If you take a $100m loan from a lender, the lender is f*cked.
- When lenders start to get affected, this is detrimental as it leads to increased collateral liquidations which have a negative price impact on related assets.
- When it comes to managing assets, carelessness with your own money is one thing, but carelessness with an investor’s money is another. 3AC had a responsibility to its stakeholders and continued to act in a reckless manner.
- So is 3AC completely done? Well, for the most part, it looks that way. However, there is a small chance they get acquired by another firm. FTX or Binance seem like logical suitors. Although the damage has already been done.
- Backtracking to May: If it weren’t for the collapse of $LUNA, it’s very likely 3AC and Celsius wouldn’t have reached this fate. Since major players in space are inextricably linked, contagion often finds a way to spread.
When will things stop?
- So what’s next for crypto after 3AC’s downfall? Well, it would be naive to suggest the contagion has stopped.
- 3AC and Celsius are two of the first institutions to reach the brink of collapse, but will certainly not be the last. Unfortunately, these events are a bad look for the space and certainly hurt credibility.
- But this great leverage reset is essential to ensure the long-term sustainability of the crypto market, as painful as it is in the short-medium term.