Three Arrows Capital (3AC): the story of the most spectacular collapse in cryptocurrencies

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It was at the top of the list of the world’s largest crypto hedge funds and now it is trying to save what can be saved – From the collapse of Bitcoin, to the demise of terraUSD, billions dollars have been “burned”.

Until last March, Three Arrows Capital (3AC) managed $10 billion of investments and topped the list of the world’s largest crypto hedge funds.

Now 3AC is “on its way” to court to declare bankruptcy after the collapse in the value of cryptocurrencies and the inability to repay its investors.

The problems for 3AC are just beginning. With the cryptocurrency market having lost over $1 trillion in value since April, investors in Three Arrows Capital are, by now, trying to salvage what they can.

The crypto trading company, Blockchain.com is trying to recover $270 million in loans to 3AC.

Voyager Digital filed for listing under Article 11 of the US Bankruptcy Code after 3AC could not repay its loans to Voyager of $670 million. Genesis and BlockFi are also recording losses due to their exposure to 3AC.

“Funding is drying up. Liquidity is being stretched to the limit. Everyone is running to ‘raise’ their money from cryptocurrency lenders,” said Nic Carter, an executive at Castle Island Ventures.

Three Arrows’ strategy focused on borrowing from other companies in the sector and investing in – often start-up – cryptocurrency projects. The company had survived for a 10-year period, giving founders Zhu Su and Kyle Davies a “good name” in the market.

“3AC was supposed to be the ‘adult in the room,'” said Nik Bhatia, an economics professor at the University of Southern California.

Official documents reviewed by CNBC indicate that lawyers for 3AC’s lenders argue that Zhu and Davies “have not begun to do business” with them. According to the official information, the company’s liquidation has not yet begun, which means the lenders remain empty-handed.

Three Arrows Capital (3AC): the story of the most spectacular collapse in cryptocurrencies

The fall

3AC’s decline began after the collapse of the algorithmic stablecoin terraUSD (UST), which relied on a complex code with no real assets to support it despite the volatility of the broader cryptocurrency market. Investors were motivated by annual returns of 20%, which analysts had warned was unsustainable.ย 

“The fall in the value of cryptocurrencies and lack of liquidity have exposed projects that promised high annual returns, leading to the collapse,” said BofA analyst Alkesh Shah.

The panic created after the collapse of terraUSD and its “sister” cryptocurrency luna cost investors $60 billion. 

3AC told the Wall Street Journal that it had invested $200 million in luna. Other analysts claimed that the fund’s exposure to the cryptocurrency was in the $560 million range. Whatever the losses, the investment ended up having zero value.

The collapse of the UST shook the markets and accelerated the decline in the value of cryptocurrencies which had already begun due to the general macroeconomic situation.

3AC’s lenders demanded a return of some of their investments due to margin calls, but the money was gone.

According to Blockchain.com CEO Peter Smith “our liquidity remains good and our customers will not be affected“. Customers, however, remain “bloodied” as they have heard similar promises from the recently bankrupt Voyager Digital.

According to Bhatia, this “domino effect” will affect any investor with significant exposure to the market. This market, which has almost no protection from regulators, will lead many to an unknown financial future.

Finally, according to Voyager Digital’s communication to its clients, the company will be slow to return some of their investments, and when and if this does occur, it will be in the form of a “basket” of cryptocurrency and shares.

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