Losses at 3AC point to potential insolvency

Three Arrows Capital (3AC) is staring down a potential insolvency following a $400 million liquidation. Established in 2012 by Kyle Davies and Su Zhu, 3AC is believed to have managed $10 billion in assets at its peak.

Trading Woes

The hedge fund is well known as a backer of projects such as Avalanche, Solana, Polkadot and Terra. These assets have all suffered following the collapse of Terra and the general market downturn.  While trading on Bitfinex last month, 3AC lost $31.37 million. Terra Research Forum whistleblower ‘Fatman’ claims that the crypto hedge fund bought 10.9 million locked LUNA for $559.6 million with the investment worth $670 today.

Amid the growing rumors, Zhu took to Twitter to publicly acknowledge the company’s difficulty:

Citing anonymous sources, The Block reported that 3AC has had collateral to the value of $400 million liquidated by top tier lenders.  Alongside beleaguered crypto lending platform, Celsius, the hedge fund has a large illiquid position in staked ETH (stETH).

Many in the crypto space believed that Celsius was leading the sell off where stETH was concerned. However, in a tweet yesterday, crypto trader MoonOverlord had figured out that 3AC was the bigger seller. “People think Celsius is the biggest stETH dumper but it’s 3AC and it isn’t relatively close”, the trader stated. The firm has been withdrawing stETH for a number of weeks, culminating in an 81,000 stETH withdrawal from Aave on Tuesday.

Risk of contagion

3AC is a VC investor in various crypto ventures including options exchange, Deribit  and crypto lending platform, BlockFi. BlockFi has already been struggling, having recently completed a funding down round, dealing with a $100 million fine from the SEC and having just announced layoffs.

Whilst the Terra collapse was a spectacular disaster for the crypto space, at least most of its effects were visible due to the public and traceable nature of the blockchain. When it comes to entities like Celsius and 3AC, the opaque nature of their operations means that it’s so much harder to assess the extent and likelihood of contagion within the crypto space. That has to be a concern for the crypto sector right now as investors and markets dislike uncertainty.

There is speculation that 3AC has sourced funds from most of the crypto lending platforms, including Celsius, Nexo, BlockFi. However, Nexo has come out to say that it declined a request from 3AC for unsecured credit 2 years ago.

The market was already incredibly fragile before these latest bombshells dropped by Celsius and 3AC. One more shock may send already frayed crypto valuations to the floor.

Zhu has been a believer in the notion of a crypto supercycle, meaning that crypto would deviate away from the four year cycles of the past with an extended cycle on this occasion. Appearing on the UpOnly podcast recently, he said that Bitcoin’s price could reach a value of $2.5 million per coin if the digital asset achieved the same market value as gold. However, he has come to the conclusion that his supercycle thesis was “regrettably wrong”. The hedge fund co-founder has also removed reference to Solana, Avalanche, Terra, Ethereum and NEAR from his Twitter bio.