Since its inception in 2012, Su Zhu and Kyle Davies' Three Arrows Capital (i.e. 3AC) has grown to become one of the largest and most authoritative hedge funds in the crypto asset market. Now, the company is facing its biggest crisis since its inception, and the effects of that crisis could ripple across the industry.
Key takeaways
- As the crypto asset market continues to fall, 3AC is facing a liquidity crisis. Sources say the company is struggling to repay its debt and could face bankruptcy.
- 3AC is likely to be forced to sell tokens obtained from crypto projects to fulfill its obligations as a debtor.
- DeFiance Capital could be affected by the bankruptcy of 3AC, which will put more pressure on the investment projects of both companies.
- With the endless stream of bankruptcy reports, U.S. blockchain media Crypto Briefing will focus on which companies may be affected by 3AC's recent liquidations and potential bankruptcies.
The 3AC crisis as it is currently known
Only when the tide recedes can you know who is swimming naked. —Warren Buffett
Earlier last week, rumors that crypto hedge fund 3AC could face bankruptcy spread widely on social media. Unofficial reports indicate that the fund had about $3 billion in assets under management in April 2022, but failed to meet margin call requirements for several of its unsettled borrowings in this case. Multiple parties said they remained silent when they informed 3AC's founders Su Zhu and Kyle Davies that their leveraged positions were at risk of being liquidated.
Other reports suggest that Zhu and Davies are more than just silent on margin calls. Over time, other funds that traded with 3AC have shared their experiences on Twitter. Danny Yuan, ceo of 8 Blocks Capital, said his company had a long-standing relationship with 3AC, and he failed to contact Zhu or Davies that week, claiming that "about $1 million in funds from his company disappeared from a trading account at 3AC, and he wanted a statement. In a June 16 tweet, he wrote: "It's one thing to lose a bet, but at least it's glorious, don't drag other people who have nothing to do with it into your bet." Of course, don't be wary of everyone, as they might have helped you. ”
During the weekend, as more and more news confirmed the rumors, rumors about 3AC margin calls and liquidations became more and more credible. According to the Financial Times, trading platform BlockFi liquidated $400 million of positions held by 3AC on the platform
While BlockFi did not explicitly acknowledge that it had taken action against 3AC's position, the company's CEO, Zac Prince, tweeted that a "big customer" that could not meet its lending margin requirements had been liquidated. Prince wrote: "The fund did not affect any of its clients. We believe we were among the first to take action against this counterparty.
In the following hours, more rumors of liquidation appeared. Trading platform Genesis confirmed it had liquidated "a large counterparty," while anonymous sources told U.S. mobile payment company Block that the company failed to meet the margin call requirements for FTX, BitMEX and Deribit.
Reports of liquidation culminated on Friday when Zhu and Daveies unveiled the hedge fund's woes in an interview with the Wall Street Journal. Davies revealed that before the collapse of the Terra trading platform, 3AC had invested $200 million in crypto asset LUNA, leaving the fund in a state of instability. He also confirmed that 3AC is considering selling its non-current assets and may accept an acquisition from another company to help it pay off its debts.
While the exact numbers have not yet been made public, 3AC is said to have managed $18 billion in assets at its peak. As the company grew, Zhu and Davies became the most recognizable figures in the industry and were known for a series of successful high-faith bets.
As one of the crypto asset industry's largest funds faces a major restructuring, fears of further spilling over into other parts of the industry have spread like wildfire. According to the information platform Crunchbase, 3AC has made a total of 56 investments in various crypto startups.
In many cases, the company is likely to take equity in the form of tokens that could be locked down for years. Now, bystanders are closely watching 3AC's past glory to find out who might be affected if the fund can't survive without intervention
Who will be affected?
Any project that allocates tokens to 3AC in exchange for funding could be affected by a company liquidation crisis. Token allocations are usually established, which means that recipients have to wait a while before they can sell them.
If 3AC needs to improve liquidity to pay off existing debt, it may switch to holding Token for liquidation when it is discharged, which will cause the fund to dump a large amount of token into the already depressed crypto market, potentially creating greater selling pressure.
While 3AC holds a lot of Token projects, not all projects face the same risks. Smaller projects with lower market capitalizations and less liquid markets are inherently more susceptible to price volatility from token sell-offs. Small-scale risk projects include, for example, crypto game startups Imperium Empires, Ascenders and Sharpnel, based on the Avalanche trading platform, which are backed by 3AC, which previously allocated tokens to early investors.
Other startups that 3AC is already involved in, such as the Ardana project, built on the Cardano trading platform, plan to continue selling Token. Over the next 13 months, 3AC will reap millions of DANA returns from its seed-round strategic investment in the Arana project. Recently, Ryan Matovu, the founder of Ardana, revealed that 3AC is the largest single investor in its startup, which puts DANA in a precarious position in the future.
3AC may choose to dispose of its Token in an OTC discount deal, which does not necessarily result in a massive Token sell-off on the open market at the end of the cashout, but this is another most likely scenario. If companies that buy 3AC believe in the long-term prospects of these projects, they are more likely to hold them — especially since they get them at a discounted price.
Whether 3AC liquidates its token or sells directly to another party, any project the fund supports in the short term is potentially risky. While the details of the company's investment deals are often private, looking at the cashing schedule for individual projects gives an idea of when and how big the upcoming sell-off will be.
The impact of 3AC events spreads
Crypto asset investment firm DeFiance Capital is another potential victim of the 3AC crisis. As 3AC's venture capital sub-fund, DeFiance follows its fund of funds in many venture capital areas. While details about the relationship between the two companies have yet to be made public, a recent tweet by DeFiance founder Arthur Cheong suggests that 3AC's liquidity issues affect more than just the fund itself.
As rumors of 3AC's bankruptcy spread last week, Cheong posted a series of tweets with subtexts that suggest his company is also having problems. On June 16 he tweeted: "Some friendships are priceless and a blessing, and some are not. ”
Many bystanders in the crypto space interpret Cheong's remarks as evidence that DeFiance is facing bankruptcy under the influence of the 3AC incident. Cheong responded by saying his company was struggling to find a solution, but did not specify exactly what was going on. Since then, Cheong has said that he is very proud of the DeFiance team and can show a person's true character in the face of adversity.
This suggests that there may still be hope for a recovery for the company. U.S. blockchain media Crypto Briefing contacted Cheong last week asking for comment on the Three Arrows crisis, but received no response.
Although the public is still unaware of the specifics of DeFiance, bankruptcy seems like a reasonable possibility given the company's ties to 3AC. If such a result occurs, DeFiance may also be forced to liquidate its Token position. In this case, any project that receives support from 3AC and DeFiance will be at greater risk.
Both the Aave and Ballancer trading platforms in DeFi exchange Token for investments from 3AC and DeFiance. While the tokens of the Aave trading platform have sold off, it is unclear which part of the token allocated by the Parader trading platform is still selling. Other trading platforms that could be in a similar situation include pSTAKE Finance and MEANfi in the DeFi project, and Civitas, Ascenders and Schrapnel in crypto gaming projects.
Start the countdown bomb attack
3AC's liquidity issues may take some time to become public. Rumor has it that as the crypto asset market fell, the company received a large number of unsecured loans from multiple institutions and used the borrowed funds to go long bitcoin and Ethereum. If the rumors are accurate, the impact of the 3AC incident will spread further, as several large businesses will face losses from lending to the company. The 3AC fund said it was considering a bailout plan, but could see more liquidation if it could not reach an agreement with creditors or other venture capital firms. With no clear signs of improvement in the macroeconomic situation, the crisis at 3AC has become a time bomb for the crypto industry.