The past few weeks have been confusing, even for solid market participants. The crypto market has lost enormous value and some players have been wiped out. However, this time around, there are also celebrities among these players, such as Singapore-based crypto hedge fund Three Arrows Capital (3AC).
3AC was founded in 2012 by Kyle Davis and Suchu, who attended Columbia University together and later worked as colleagues at banking giant Credit Suisse.
Over the years, 3AC has become one of the top players in the industry involved in numerous projects such as LUNA, Aave, Avalanche, BlockFi, Deribit and Solana. As it grew, the company began making more risky bets on the market, and when LUNA collapsed in May, it triggered a chain reaction of events that ultimately led to the collapse.
The rumored factory was already bubbling on Twitter in advance, but on June 16th Financial Times Reported that 3AC was unable to handle the margin call. A few days later, The Wall Street Journal 3AC has reported that it may not repay the money borrowed from crypto broker Voyager Digital. The total amount is $ 665 million.
Later, Voyager Digital had to file for bankruptcy, and CEO Ehrlich revealed that the main reason was the lack of repayment from 3AC. Further infections occurred in the industry as 3AC was unable to respond to margin calls.
As we will see later, 27 companies were affected, causing a total of more than $ 3 billion in damage.
History of downfall
At its peak, 3AC managed about $ 18 billion in crypto assets and became one of the top companies in the industry. Huge amounts of money were made possible by early investments in successful projects such as Ethereum (ETH) and Avalanche (AVAX).
So how do you lead such a company with these assets to bankruptcy? In short: a combination of inadequate risk management, recklessness in dealing with business partners, and a significant portion of greed.
LUNA: UST crash was the origin
The beginning of the 3AC problem can be traced back to the collapse of Stablecoin UST by LUNA and its algorithms. 3AC occupies an important position in two assets, worth about $ 560 million at its peak and about $ 600 after its price plummeted to near zero within a few days.
3AC has built the above positions using high leverage through counterparty funds. 3AC put funds into the anchor protocol without the knowledge of the counterparty.
From rumors to facts
When Zhu Su removed his presence on social media and disappeared from the public eye, it all began to become apparent. This led to the first rumors of a 3AC margin call on June 14, especially when 3AC sold 60,000 stETH. Luna disasterNo one imagined that 3AC could be affected by bankruptcy.
Shortly thereafter, news reports reported that 3AC had deposited $ 245 million of ETH on lending platform Aave and used it as collateral to borrow $ 189 million on USDC and USDT. Therefore, the loan-to-value ratio was only 77%. 3AC was unable to repay this loan or increase collateral. But it only got worse from here.
One of the first victims to speak publicly was Danny Yuan, head of transactions for market maker 8Blocks Capital.
11) What we have learned is that they have been used everywhere for a long time and have received margin calls. Instead of answering the margin call, they ghosted everyone. The platform had no choice but to close positions and the market fell further.
— Danny (@ Danny8BC) June 16, 2022
Margin calls accumulated in a very short time. 8BlocksCapital also expected a repayment from 3AC, but this did not happen. Not only that, there were no signs of life from 3AC personnel, except for a tweet from Zhu on June 15.
We are in the process of communicating with stakeholders and are working hard to resolve this.
— Zhu Su 🔺 (@zhusu) June 15, 2022
Who suffered the most from 3AC bankruptcy?
To understand the full impact of the 3AC blunder, here’s an overview of some of the prominent victims dragged down with hedge funds. In total, Three Arrows Capital has borrowed US $ 3.5 billion from more than 20 different companies.
- BlockFi: After liquidating 3AC, I suffered a huge loss. Terms of acquisition with FTX
- Voyager: Lending $ 650 Million to 3AC
- Genesis: Lending $ 2.36 billion to 3AC
- Derivit: 3AC was an investor in DRB Panama. On June 24, they had to file a liquidation application in the British Virgin Islands
- Blockchain.com: Lending $ 270 million to 3AC.Dismissed 25% of staff
- Finblox: Where 3AC was an investor, the withdrawal had to be closed in the turmoil
Clearing and aftermath
On June 29, a court in the British Virgin Islands ordered the liquidation of 3AC, which is now overseen by consulting firm Teneo.
3AC Chapter 15 Bankruptcy Shortly thereafter, in early July in the Southern New York area.
For the next few days, people wondered where SuZhu and Kyle Davies were and why they didn’t bother to contact the creditors. On July 12, the US District Court frozen the remaining US assets of 3AC without contact from the founder.
Shortly thereafter, Teneo announced the liquidator Russell Crumpler. Over 1,000 pages of affidavit About the collapse of 3AC. Some small but easy-to-understand details have been revealed regarding the “expenses” of Zhu and Davies. For example, they paid a down payment for a yacht that cost $ 50 million, but Zhu and his wife bought two homes in Singapore worth more than $ 28 million.
The last significant event took place on July 22, when Zhu Su finally had to break the silence and face unpleasant questions. Bloomberg News Interview.. According to him, people were too reassured and comfortable in the protracted bull market. He argued that this led to complacency and that the market turmoil after the collapse of LUNA was too great for 3AC to deal with.
Conclusion: Greed can hurt anyone
What has happened with this problem in the last few weeks, and probably will continue to happen in the coming months, is almost incredible. No one, including myself, would have thought that a 3AC-sized company could be ruined so quickly.
But it’s a cryptocurrency market, a market of leverage and greed, and no one is protected for the time being. It is a natural urge to want “more”.But as Aristotle already knows with the help of Greek ethical sayings Moderate (“Metes”, Greek, English “middle”), all virtues, in this case ambition, are only useful if the middle is balanced and the pendulum does not swing too small or too large.
All market participants should be warned now: Greed can hurt anyone, no matter how big the bankroll is already!
