I. What is 3AC?
Three Arrows Capital (3AC) is one of the most influential Venture Capitals in the crypto world. The VC was founded in 2012 by Su Zhu and Kyle Davies with the initial capital of $1.2 million. Their focus in the early stage was trading traditional emerging currencies. In just 3 years, they were hiring up to 35 employees.
Its founder Su Zhu has been dabbling on Bitcoin since 2013. Back to 2017, the concept of Crypto was so clear, it will follow the dot-com cycle. Then they diversified into options, equities and crypto after the competitiveness in the same industry was so high. And in 2018, 3AC concentrated exclusively on crypto, mainly in Bitcoin and Ethereum.
As we know what happened in the next years 2019-2021, the crypto cycle became true and returned wealth to 3AC. 3AC’s investment strategy has still been trading Bitcoin and Ethereum derivatives. However, the capital tried to diversify its investment to lots of blockchain companies in equity round, layer 1, DeFi, Gaming, NFTs and other Funds.
The investment portfolio of 3AC now is solid and wonderful that every capital would dream of. That makes the name 3AC popular among crypto world. According to its website, the blockchain holdings alone are worth close to $10 Billion. Also, according to Su Zhu, they were not receiving any external funds at all, so this is basically their own money.
II. What caused the collapse?
Terra Collapse back to May was the worst event of 2022. 3AC has bought 10.9M of $LUNA locked for $559.6M. Now the investment is worth barely nothing.
The investment firm is in the process of figuring out how to repay lenders and other counterparties after seeing liquidation totaling at least $400 million. And Three Arrow Capital co-founder Zhu Su’s recent tweet has confirmed that the firm is indeed in distress.
Davies and Zhu acknowledged heavy losses related to trades in Luna and the now-defunct algorithmic stablecoin TerraUSD, saying they were caught by surprise at the speed of the collapse of these tokens.
Grayscale Bitcoin Trust:
Another failure that came back to bite 3AC was through the Grayscale Bitcoin Trust, or GBTC. The closed-end fund allows people who can’t or don’t want to hold Bitcoin directly to instead buy their ‘shares’. For a while, GBTC was one of the few US-regulated crypto products, so it had the market to itself. It was so popular that its shares traded at a persistent premium to the value of the Bitcoin it held on the secondary market.
Grayscale allowed 3AC to purchase shares directly by locking Bitcoin to its platform. Then 3AC could sell the shares to the secondary market. That premium meant any sales could net an attractive profit for the big investors. At the end of 2020, 3AC’s was the largest holder of GBTC, with a position then worth $1 billion.
However, the shares were locked up for six months at a time. And starting in early 2021, that restriction became a problem. GBTC’s price slipped as it faced stiff competition from similar products. As the months went on, the discount got wider and wider and the so-called GBTC arbitrage trade no longer worked – especially hurting investors like 3AC.
stETH lose peg:
The name stETH has made many people misunderstand about the concept of staked-ETH. In fact, stETH is just the staked-ETH on Lido. That means stETH was not designed to peg to ETH.
And then, Lido-staked ETH prices slipped due to liquidity issues. This led to big players to dump st-ETH to convert to ETH. Alameda Research took the first action then 3AC. The fall of stETH led to the fall of not only Celsius, but also 3AC. The loss of 3AC was estimated at over $31M in this case.
The collapse of 3AC:
We have seen that there are many interconnected events that led to the collapse of 3AC. However, the main reasons for this come from the huge leverage positions they hold and money from the biggest lenders worldwide. When the bear market comes, they have been struggling with these positions. And the situation became worse as they were trying to earn money back.
3AC’s CEO first speech after the collapse:
In response to questions about what went wrong at the firm, Zhu cited overconfidence born of a multiyear bull market that infused not just him and Davies but nearly all of the industry’s credit infrastructure, where lenders saw their values swell by virtue of financing firms like his.
Founder Zhu said that people need to know what they were getting themselves into, 3AC was a risky firm. If you go to our website, they’ve always had massive disclaimers about crypto risk. We’ve never once pitched ourselves as risk-free, like a simple yield.
When crypto markets first started buckling in May, they met all margin calls. “And, and so people understood that there was a risk involved.”, Zhu said.
The fall of 3AC was a result of many interconnected events: first from Terra Collapse. Then the fund was trying to get their money back but they had just made the situation worse.
Overall, 3AC was just a risky investment fund that investors should have researched deeply before putting money in it.
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