The crypto market has been rocked by the fall of big names in the industry since early May. It started with Terra, then Celsius proved unable to meet its obligations and the latest major player to fall off its pedestal is Three Arrows Capital.
Within a month Terra gave the dominoes their first push and they hit Three Arrows Capital (3AC) mercilessly hard.
Loss of confidence
Terra’s collapse left its mark on the entire crypto market (even the bitcoin price suffered below) and 3AC was directly affected. This article looks at the events that led to the eventual demise of a company that until recently was seen as respectable and of which almost everyone was full of confidence.
Major effect on the market
Initially, Terra’s fall in mid-May seemed like an isolated incident, with the only victims being investors who collectively saw billions in value evaporate. Within a few weeks, however, it became clear that the impact was greater than expected, such as what now appears to be for 3AC.
Much more dangerous than thought
The crypto fund had between $200 million and $450 million worth of Luna (Terra’s coin) but could not sell it. This was because the coins were locked in a smart contract and during the few days that Luna’s price went to almost 0, 3AC’s investment was only worth a few hundred dollars.
At first, the company seemed to be recovering from Luna’s falling price, but it would soon become clear that 3AC was in a more dangerous position than investors thought.
Founder of 3AC Su Zhu would soon confirm that something was not quite right. He said that something was wrong with the market and that his company would have to take a huge hit.
The company had already had to absorb some losses due to overall declining crypto market, and Luna’s crash put even more pressure on 3AC. Since the overall crypto market has not yet recovered, it was announced that a large loan from 3AC might be liquidated by a large unnamed lender.
On liquidations and loans in the crypto market
Basically 3AC is an investment company, they invest their money, or borrowed money in crypto companies. To do this they borrow cryptocurrency or money from lenders, but then they have to deposit collateral.
The collateral can consist of crypto, but also, for example, stablecoins or fiat money. If the value of the collateral drops while they have a loan outstanding, then the collateral must be replenished.
The crypto fund turned out not to have enough funds to replenish the collateral so their position was liquidated. This means that the collateral is taken from 3AC.
Other liquidations would soon follow, first at crypto exchanges like Bitmex and FTX. BlockFi and Genesis also informed that several positions of 3AC were liquidated. BlockFi let it be known that they were able to take the hit through good risk management and Genesis settled the losses on their own balance sheet.
Everyone is a genius during bull market
When the bull market started in mid-2020 and continued until the back of 2022, everyone seemed like a winner. All coins went up and even turds turned into digital gold. No one is careful during a bull market and risk management is a dirty word.
However, when we are dealing with a volatile market like cryptocurrency, risk management, prudent planning and caution cannot be overemphasized. They help both small and large investors to make better decisions instead of tribalism, conviction and confidence in a project.
3AC invested in all the major crypto projects and raised money from everyone through investments or loans. This seemed to go well for a long time because they were borrowing against collateral which kept increasing in value. All their investments also kept growing in value during the bull market.
Debt becomes loss
As cryptocurrency prices have fallen hard this year, 3AC has not been able to meet the requirements of the various collateral and the lenders are suffering losses and debts.
Eventually, the liquidated debts will be recorded as a loss by these parties, but it remains to be seen how they will handle this. Many analysts expect that due to the collapse of both Terra and 3AC, the implications will be great.
Therefore, it is wise to adopt a defensive strategy for your portfolio at times like this.
Defend your portfolio during bear market
A defensive strategy involves regularly rearranging your portfolio to maintain an intended asset allocation (e.g., 70% BTC, 20% stablecoins, 10% altcoins). In addition, you should also think about placing stop loss orders; and holding fiat money or stablecoins to cut losses and take advantage of falling prices.
A defensive strategy is designed to protect investors from hefty losses due to large market declines. The primary goal is to provide protection, and then to provide modest growth.
Or, if you believe in the potential of bitcoin, then convert everything into BTC because 1 sat will always be 1 sat.