Three Arrow Capital (3AC), a Singapore-based crypto hedge fund that at one point managed more than $10 billion in assets, has become one of several crypto firms that went bankrupt in this bear market.
However, the downfall of 3AC wasn’t just a market-driven phenomenon. As more information emerged, the crash looked more like a subjective crisis caused by an unsupervised decision-making process.
To put it succinctly, the hedge fund has made a series of large directional trades in Grayscale Bitcoin Trust (GBTC), Luna Classic (LUNC) and Staked Ether (stETH) and has borrowed funds from more than 20 large institutions. The cryptocurrency crash in May triggered a series of hedge fund investment spirals. The company went bankrupt and loan defaults led to a mass contagion in cryptocurrencies.
The first signs of possible bankruptcy occurred in June with a mysterious tweet from co-founder Zhu Su in the wake of the 3AC money movement. The crash of the cryptocurrency market led to a sharp drop in the price of cryptocurrencies including Ether (ETH), which led to a series of liquidations for the hedge fund.
3AC exchanged nearly $500 million in Bitcoin (BTC) with the Luna Foundation Guard for an equivalent amount of cash in LUNC just weeks before Terra exploded.
The rumors escalated after Zhu removed all mention of investments in ETH, Avalanche (AVAX), LUNC, Solana (SOL), Near Protocol (NEAR), Mina (MINA), Decentralized Finance (DeFi), and non-fungible tokens (NFTs) from his site. Twitter bio, mentioning Bitcoin (BTC) only.
3AC’s liquidation series has had a disastrous effect on crypto lenders such as BlockFi, Voyager, and Celsius. Many cryptocurrency lenders eventually had to file for bankruptcy themselves due to exposure to 3AC.
Sam Callahan, Bitcoin Analyst at BTC Savings Scheme Swan, told Cointelegraph:
“Using only publicly available information, in my opinion, the failure of 3AC can really be broken down into two things, 1) poor risk management and 2) potentially unethical and criminal behavior. The first is a classic example of what happens when you use too much leverage, and the trade turns against you. In this case, 3AC has borrowed hundreds of millions of dollars, mostly from crypto-lending platforms, to make arbitrage bets on risky DeFi protocols. One such risky stake was Terra. Of course.”
He added that 3AC did not tolerate the mistakes, went on to borrow more money and “allegedly used clients’ money to bet trying to get their money back. This was the moment 3AC turned into a blatant Ponzi scheme. As general market conditions continued to deteriorate and liquidity dried up, it was exposed 3AC for the Ponzi scheme it has become, and the rest is a thing of the past.”
Consider the schedule of events at 3AC:
May 11-12: Right after Luna’s collapse, many lenders ask about Luna’s exposure, and 3AC says there’s nothing to worry about.
May 18: Co-founder Kyle Davis attempts to block loan recall
June 3: Loan interest rates raised due to market conditions
June 7: 3AC team invites investors to new opportunities to save the company
June 10-11: Crypto options broker Deribit called margin for a 3AC mobyDck account
June 13: Davies tries to arrange a new loan from Genesis to pay off a margin call
June 16-17: 3AC is widely reported for bankruptcy
Ultimately, 3AC filed for Chapter 15 bankruptcy on July 1 in New York court without knowing the whereabouts of the founders.
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Hubble Protocol co-founder Marius Siopotario believes that the 3AC lending crisis highlights the resilience of the DeFi ecosystem. He told Cointelegraph:
“The challenges faced by 3AC are not unique to cryptocurrencies or the financial markets as a whole. Cryptocurrency is currently the only financial market where market dynamics are allowed. The 3AC crisis has revealed how resilient DeFi protocols really are. For example, the percentage of lending losses have suffered and margin has been called. Fearing on-chain automated liquidations that are visible to all, they hurried to pay the MakerDAO and Compound loans first.”
3AC owes creditors $3 billion
3AC liquidators requested a stay of proceedings against the company and access to its offices in Singapore in a petition to the Singapore Supreme Court. Court documents show that 3AC owes about $3 billion to creditors, including 3AC’s largest creditor, trader Genesis Asia Pacific, a subsidiary of Digital Currency Group, which lent $2.36 billion.
Among the long list of creditors, Zhu Su also filed a claim for $5 million. In addition to Zhu’s claim, investment manager 3AC ThreeAC Limited is reportedly filing a $25 million claim. Kyle Davis’ wife, Kelly Kale Chen, is said to be seeking a claimed debt of $65.7 million in the same lawsuit in the Eastern Caribbean Supreme Court. A court in the British Virgin Islands ordered 3AC’s liquidation on June 27.
There is speculation that the founders of Z