Three Arrows Capital is a prominent crypto hedge fund that at one point had $10 billion in assets under management, but due to the recent market turmoil, the fund is getting liquidated, and just defaulted on a $670 Million loan.
The Setup That Killed 3AC
Digital Asset Broker, Voyager Capital, had lent 3AC 15,250 bitcoins and $350 million in USDC stablecoin, equating to a total of about $670 million at Mondays prices. They also reportedly had loans from multiple other firms such as BlockFi and deribit.
Among 3ACs risky bets on a presumed crypto supercycle – a prolonged period of strong growth in an asset class or industry – were Terra LUNA, Grayscales bitcoin trust GBTC, and Staked Ethereum STETH.
Where These Bets When Very Wrong
GBTC: 3AC was the largest holder of GBTC, owning 38 million shares, which at its peak would have been worth about $2.1 Billion. Due to demand because it was the only option for institutional investors to get exposure to bitcoin GBTC traded at a premium, this allowed 3AC to profit by making an arbitrage on it. Arbitrage is a strategy in which an investor simultaneously buys and sells the same asset in different markets to profit from the price spread. However, due to the issuance of new Bitcoin ETFs over the last year the premium which GBTC previously traded at, quickly turned into a discount with an ever-widening spread. There is no information on when exactly they closed their position, but according to Bloomberg as of June 17th, 3AC was no longer a holder of GBTC.
LUNA: Reportedly 3AC had bought 10.9 Million locked LUNA at a total of about $500 Million. After the LUNA and UST collapse in May, that LUNA is now worth under $1,000.
STETH: Staked ETH was the long bet that 3AC had made, which is essentially tokenized ETH which generates yield, and will be redeemable for ETH after the network merges to Ethereum 2. This seemed like a no-brainer bet which multiple other large firms, such as celsius, also had positions in. However, STETH depegged from ETH leading some of these larger firms to start to dump it, which led to liquidity issues and a further drop in STETH relative to ETH. 3AC was then forced to start liquidating its position due to losses, and margin calls.
Analyst at Bitcoin Magazine Pro and senior analyst at UTXO Mangement, Dylan Leclerc, stated in a tweet that he believes 3AC was a highly overleveraged Ponzi relying on a prolonged crypto bull market.
The entire situation which has put many large crypto firms on the verge of liquidation, default, and insolvency has exposed how intertwined the firms in the space are and the amount of over-leverage and speculation that has been happening under the radar in crypto. Given the current economy and the state of the crypto market, it isn’t clear that the pain is over, however, the event of these overleveraged firms being exposed is likely a good thing for the health of the crypto market in the future.
“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” – Satoshi Nakamoto, the pseudonymous founder of bitcoin.
Bitcoins intended purpose was to flee the current corrupt financial system. However, like the subprime mortgage crisis, this recent crash is yet another example that no market or asset is immune to over-leverage and greed. The 2 key takeaways from this entire market crash and liquidation event are:
- Don’t expect 15 to 20 Percent yields to come without their risks.
- Don’t use leverage on highly volatile assets.