- Three Arrows Capital currently faces potential insolvency after being liquidated by its lenders.
- The firm has backed projects like Avalanche, Polkadot, and Ethereum with double-digit declines over the past month.
- Zhu assures the crypto community that Three Arrows Capital is committed to working it out.
UPDATE: Three Arrows Capital, one of the biggest cryptocurrency hedge funds in the world, is triggering more risk-averse headlines on Wednesday, causing the entire cryptocurrency to keep falling with it. 3AC, founded by classmates Zhu Su and Kyle Davies, is trying to keep afloat after cryptocurrency website The Block reported it might face insolvency, citing close sources. Among the heavy losses from highly leveraged positions the hedge fund is incurring, one of the most notable and the initial cause of what seems to be a generational market wipeout were positions in Terra's LUNA – now turned into Luna Classic (LUNC) – which went from almost $600 million value to being almost currently worthless. Despite Zhu Su tweeting out that they are "fully committed to working this out", the heavy 3AC trouble is one more step (after the Terraform Labs and Celsius Network fiascos) in the process of what looks like the explosion of a crypto bubble, which might give room for a new era of this still young financial ecosystem.
8K #ETH liquidated from address supposedly owned by 3AC (caution: onchain analytics has its own limitations)— Omkar Godbole (@godbole17) June 15, 2022
Three Arrows Capital, considered the world's most successful crypto hedge fund, was considered notorious for pushing the "supercycle" thesis and endorsing Avalanche, Solana, Polkadot, and Terra ahead of their rallies. Now, these assets have seen double-digit losses and Three Arrows seems in trouble. Proponents consider co-founder Zhu Su's statement cryptic.
Did Three Arrows Capital fail to meet a margin call?
This week Three Arrows Capital, a hedge fund established in 2012, started moving crypto assets to top-up funds on DeFi platforms like AAVE to avoid potential liquidations. With Ethereum price plummeting close to $1,000, nearly $81 million in long and short positions was liquidated across exchange platforms.
Such liquidations triggered by the Ethereum price nosedive could have stressed Three Arrows Capital and risked hundreds of millions in liquidations across multiple positions. The crypto community started speculating about the venture capital firm being unable to meet a margin call. Three Arrows immediately moved around cryptocurrencies to top up their funds.
Colin Wu, a crypto reporter, revealed that Three Arrows Capital lost $31.37 million through trading on Bitfinex in May 2022. The address marked as 3AC has a collateral position of 211,999.12aWETH (worth $235 million) on AAVE V2 and a total debt of $183 million in stablecoins USDC and USDT. Wu argues that if the Ethereum price plummets to $1,014, the collateral positions will be liquidated. Therefore, 3AC is now paying off its debt.
The wallet address marked 3AC:
- used USDT/USDC to repay the debt and withdraw Ethereum
- converted ETH to USDT/USDC through "sinofate.eth" and repaid it.
Within a 24-hour period, the address has sold about 50,000 Ether.
Three Arrows Capital is aggressively paying off AAVE debt
Celsius, a leading crypto lender, shored up positions to mitigate the risk of liquidations and accounts for a significant proportion of the Total Value Locked (TVL) across various platforms in DeFi. Three Arrows Capital is a major borrower, and the collapse of lenders or borrowers in DeFi could have a significant impact on the ecosystem.
Does Three Arrows Capital face potential insolvency?
The Block reported that, according to well-placed sources, Three Arrows Capital has funded options exchange Deribit, and financial services firm BlockFi, among other bets in the crypto ecosystem. The hedge fund is now in the process of making itself whole with lenders and counterparties after facing liquidations at top-tier lenders in crypto.
Sources have refused to share the names of lending firms. However, Three Arrows Capital has taken a $400 million hit in liquidation. The sources reported by The Block maintained that the hedge fund maintained limited contact with counterparties since the liquidations.
Liquidation of multiple positions is one of several concerns the crypto hedge fund faces when projects like Avalanche, Solana, and Polkadot, backed by 3AC, are down 57%, 51.7% and 38.6%, respectively.
Interestingly, in the colossal crash of Terraform Labs’ sister tokens, LUNC (previously LUNA) and TerraUSD (UST), 3AC sustained significant losses due to heavy investment in the token.
FatMan, a whistleblower from the Terra Community Forum, revealed that the hedge fund bought 10.9 million locked LUNC (previously LUNA) for $559.6 million, and the investment is now worth $670.45.
3AC pushed the "supercycle" thesis for most of 2021
Throughout 2021, Three Arrows Capital was considered notorious for pushing the "supercycle" thesis and endorsing Ethereum-alternatives Solana, Avalanche, and Terra ahead of their parabolic price rallies.
Since then, LUNC (previously LUNA) bit the dust and lost nearly 100% of their value, and Solana and Avalanche both lost 50% of their price over the past year. Crypto Twitter noted that Zhu Su, the co-founder of 3AC, has now removed references to these Ethereum-alternative projects that he endorsed from his Twitter bio.
Zhu comes out with a statement, suspends rumors
Zhu broke his silence on the speculation around liquidation and said,
We are in the process of communicating with relevant parties and fully committed to working this out— Zhu Su (@zhusu) June 15, 2022
Ryan Selkis, founder and CEO of Messari, argued that 3AC could have started to reposition its balance sheet after being on the
the wrong side of two synthetic trades- with size- in GBTC and stETH.
Selkis believes that with the Ethereum merge coming up, it is likely that 3AC could find underwriters to help the firm through any temporary insolvency.
1/ Rumors + speculation:— Ryan Selkis (@twobitidiot) June 15, 2022
3AC was unfortunately on the wrong side of two synthetic trades - with size - in GBTC and stETH.
In other words, a temporary condition vs fundamentally bad bet which may be why they have a shot at fighting through an insolvency. https://t.co/zkeRafrWIZ
Analysts identified weekly top gainers
FXStreet analysts believe the weekly top gainers FLM, UNFI and LIT are hinting at a steep correction in their price. For more information, watch this video:
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