The Collapse of the Investment Fund Three Arrows Capital (3AC)
Three Arrows Capital, one of the leading hedge funds in the Crypto market, is facing the risk of default. What made 3AC fall into the situation it is today. Let’s find out with Coincu what happened to Three Arrow Capital.
What is Three Arrows Capital (3AC)?
Three Arrow Capital is a venture capital fund founded in 2012 by Shuzu and Davies. Initially, the fund focused mainly on short-term transactions such as Forex trading, arbitrage, and investing in derivative products.
In 2013, the fund started paying attention to the Crypto market and invested in projects with a long-term trend.
Three Arrows Portfolio
Three Arrows Capital invests in the direction of “Eat it all, lose it all” with a high risk appetite 3AC’s portfolio spans many areas such as DEX, Lending, Base Protocol, Asset Management. capital service providers such as BlockFi, Deribit and other funds such as Multicoin Capital, Coincident Capital, etc.
Previously, Three Arrows Capital mainly invested in projects on Ethereum. However, until 2021, the fund begins to invest in other blockchains such as Solana, Avalanche, .. and projects Defi, Gaming. In which, investments in blockchain layer 1 (Solana, Avalanche,…) and Derivatives (Dydx, Perpetual) bring great profits to the fund.
Why did the Three Arrows fall?
Global financial markets fall
Global financial markets are in a tense period. Policy to raise interest rates to the highest level in decades to control inflation. Inflation in the US reached its highest level in more than 40 years. The price of oil raw materials has increased along with the tense war between Ukraine and Russia.
On the crypto side, with the nature of a large fluctuation range and the general influence of the global market, the price of $BTC did not hold the $20K and $ETH also dropped deeply at the $1K. This makes investors in the market very confused. Even large investment funds in the market are significantly affected.
The Fall of LUNA and UST
The event that started the market’s chain of tragedies came from Terra’s attractive 20% interest rate model. As the peg mechanism between LUNA and stablecoin UST failed to hold up in the downtrend market despite efforts to put BTC in the reserve fund. The Terra event has had a serious impact on many organizations, including the Three Arrows Capital.
We can see the Three Arrows Capital taking a heavy toll on LUNA’s deal. Three Arrows Capital’s investment of 10.9M $LUNA was worth nearly $600M, now it is only worth $670.
stETH loses peg
Three Arrows Capital as well as other funds invest in ETH. Specifically, 3AC has invested up to more than 660 million USD worth of ETH and to increase profits 3AC deposited in Lido to receive interest and get stETH.
Then, to take advantage of the liquidity of stETH, 3AC mortgaged to Aave to borrow ETH and transferred ETH to Lido for stETH ⇒ creating a loop to optimize profits. However, the market did not support this plan of 3AC and it caused stETH to lose peg seriously.
After Alameda sold off stETH causing stETH to lose its peg, 3AC also sold off to widen the liquidation threshold.
On the afternoon of June 15, Three Arrows sold $40M worth of stETH to keep a $264 million Aave loan and $35 million Compound loan from going into liquidation.
However, the community has raised many questions about whether 3AC is still liquid. And some on-chain analysis has found some clues that 3AC is in an unstable phase
More specifically, on June 15, the wallet allegedly belonging to 3AC was liquidated on Compound.
On June 17, 3AC was liquidated by exchanges such as FTX, Deribit and Bitmex.
And some other evidence that 3AC is moving their retail assets from different exchanges to an exchange to sell into Stablecoins. This proves that 3AC is in a very difficult situation.
Excessive leverage
The biggest reason why 3AC is in today’s situation is the use of excessive leverage.
Leveraged staking strategy.
There are many projects and funds that have taken advantage of the mechanism of stETH from the LIDO platform to optimize profits, and so is 3AC. However, as stETH loses its peg and declines in value, it makes the borrowed assets more vulnerable to liquidation. It also leads to a chain collapse because these are high-leverage loans
Leverage assets of other projects.
Not only using its own capital, 3AC also uses capital from other projects.
Specifically, 3AC has signed a capital use contract with 8BlocksCapital company, allowing 3AC to charge high fees on their loan, but when there is a request to withdraw assets, 8BlocksCapital can withdraw at any time. However, on June 12-13, when this fund requested a withdrawal, 3AC did not respond.
In addition, a KOLs on the market, the DeFi Edge, said that some projects such as Protocol X and others have used 3AC’s fund management service with an interest rate of 8%. And currently, these projects do not communicate with 3AC.
Influence on the market
Involved in lending platforms
Three Arrows Capital is considered one of the top funds in the Crypto market with an asset value of up to $18B. This fund loves to use leverage, simply understood that if 3AC wants to buy 10 billion USD of BTC with 5x leverage, they can borrow 8 billion USD in BTC from lenders and use their 2 billion USD.
Therefore, when they run into trouble, it will also have a significant impact on the lending platforms they used to borrow from. Specifically, certain websites like Genesis, BlockFi, Maple Finance,…
We can imagine, when 3AC’s assets were liquidated, they were forced to pay their debts. Otherwise, their assets will be liquidated. When their loans are too large to be sold off the market will make the market continue to decline.
But this case is more complicated, because 3AC borrows from many different lenders. If 3AC’s position causes lenders to lose money, other investors panic because the market drops withdraw at the same time such withdrawal pressure will cause lenders to panic because they also depend on big borrowers like 3AC .
The projects 3AC has invested
For projects in the years 2019-2021 and 3AC lead round investments. There will be no small impact. Because the majority of tokens of these projects have already been paid. If 3Ac goes bankrupt, they will be forced to sell their investment assets (specifically, tokens from the projects they invest in) to pay off their debt. This will greatly affect these projects and may lead to project collapse.
For Projects invested in 2022, will not have too much impact because often the tokens of these projects will not be paid to private or seed investors. However, this will also create a negative impact on the users of these projects.
Verdict
From the above event, we can draw some lessons as follows:
- Don’t put too much faith in investment funds. In essence, investment funds have unique investment approaches. Additionally, they have a different investment strategy than we do. As a result, we must consider if an investment fund’s investment philosophy aligns with our own. and should only make reference to their portfolio based on their performance and reputation as investors.
- Understanding macroeconomics, to know the impact of economic policies on financial markets. From there, it is possible to develop appropriate investment strategies for each different time.
- Always have backup plans. The market will have events that we cannot expect, such as Terra crashing, stETH losing peg or Three Arrows Capital going bankrupt. Therefore, there must always be plans for the worst-case scenario in the market to protect your investment capital.
Above is Coincu’s entire analysis of the Three Arrows Capital investment fund and why this fund is on the verge of bankruptcy.
If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
Ken. N.
Coincu Ventures
Author
Analysis
The Collapse of the Investment Fund Three Arrows Capital (3AC)
Three Arrows Capital, one of the leading hedge funds in the Crypto market, is facing the risk of default. What made 3AC fall into the situation it is today. Let’s find out with Coincu what happened to Three Arrow Capital.
What is Three Arrows Capital (3AC)?
Three Arrow Capital is a venture capital fund founded in 2012 by Shuzu and Davies. Initially, the fund focused mainly on short-term transactions such as Forex trading, arbitrage, and investing in derivative products.
In 2013, the fund started paying attention to the Crypto market and invested in projects with a long-term trend.
Three Arrows Portfolio
Three Arrows Capital invests in the direction of “Eat it all, lose it all” with a high risk appetite 3AC’s portfolio spans many areas such as DEX, Lending, Base Protocol, Asset Management. capital service providers such as BlockFi, Deribit and other funds such as Multicoin Capital, Coincident Capital, etc.
Previously, Three Arrows Capital mainly invested in projects on Ethereum. However, until 2021, the fund begins to invest in other blockchains such as Solana, Avalanche, .. and projects Defi, Gaming. In which, investments in blockchain layer 1 (Solana, Avalanche,…) and Derivatives (Dydx, Perpetual) bring great profits to the fund.
Why did the Three Arrows fall?
Global financial markets fall
Global financial markets are in a tense period. Policy to raise interest rates to the highest level in decades to control inflation. Inflation in the US reached its highest level in more than 40 years. The price of oil raw materials has increased along with the tense war between Ukraine and Russia.
On the crypto side, with the nature of a large fluctuation range and the general influence of the global market, the price of $BTC did not hold the $20K and $ETH also dropped deeply at the $1K. This makes investors in the market very confused. Even large investment funds in the market are significantly affected.
The Fall of LUNA and UST
The event that started the market’s chain of tragedies came from Terra’s attractive 20% interest rate model. As the peg mechanism between LUNA and stablecoin UST failed to hold up in the downtrend market despite efforts to put BTC in the reserve fund. The Terra event has had a serious impact on many organizations, including the Three Arrows Capital.
We can see the Three Arrows Capital taking a heavy toll on LUNA’s deal. Three Arrows Capital’s investment of 10.9M $LUNA was worth nearly $600M, now it is only worth $670.
stETH loses peg
Three Arrows Capital as well as other funds invest in ETH. Specifically, 3AC has invested up to more than 660 million USD worth of ETH and to increase profits 3AC deposited in Lido to receive interest and get stETH.
Then, to take advantage of the liquidity of stETH, 3AC mortgaged to Aave to borrow ETH and transferred ETH to Lido for stETH ⇒ creating a loop to optimize profits. However, the market did not support this plan of 3AC and it caused stETH to lose peg seriously.
After Alameda sold off stETH causing stETH to lose its peg, 3AC also sold off to widen the liquidation threshold.
On the afternoon of June 15, Three Arrows sold $40M worth of stETH to keep a $264 million Aave loan and $35 million Compound loan from going into liquidation.
However, the community has raised many questions about whether 3AC is still liquid. And some on-chain analysis has found some clues that 3AC is in an unstable phase
More specifically, on June 15, the wallet allegedly belonging to 3AC was liquidated on Compound.
On June 17, 3AC was liquidated by exchanges such as FTX, Deribit and Bitmex.
And some other evidence that 3AC is moving their retail assets from different exchanges to an exchange to sell into Stablecoins. This proves that 3AC is in a very difficult situation.
Excessive leverage
The biggest reason why 3AC is in today’s situation is the use of excessive leverage.
Leveraged staking strategy.
There are many projects and funds that have taken advantage of the mechanism of stETH from the LIDO platform to optimize profits, and so is 3AC. However, as stETH loses its peg and declines in value, it makes the borrowed assets more vulnerable to liquidation. It also leads to a chain collapse because these are high-leverage loans
Leverage assets of other projects.
Not only using its own capital, 3AC also uses capital from other projects.
Specifically, 3AC has signed a capital use contract with 8BlocksCapital company, allowing 3AC to charge high fees on their loan, but when there is a request to withdraw assets, 8BlocksCapital can withdraw at any time. However, on June 12-13, when this fund requested a withdrawal, 3AC did not respond.
In addition, a KOLs on the market, the DeFi Edge, said that some projects such as Protocol X and others have used 3AC’s fund management service with an interest rate of 8%. And currently, these projects do not communicate with 3AC.
Influence on the market
Involved in lending platforms
Three Arrows Capital is considered one of the top funds in the Crypto market with an asset value of up to $18B. This fund loves to use leverage, simply understood that if 3AC wants to buy 10 billion USD of BTC with 5x leverage, they can borrow 8 billion USD in BTC from lenders and use their 2 billion USD.
Therefore, when they run into trouble, it will also have a significant impact on the lending platforms they used to borrow from. Specifically, certain websites like Genesis, BlockFi, Maple Finance,…
We can imagine, when 3AC’s assets were liquidated, they were forced to pay their debts. Otherwise, their assets will be liquidated. When their loans are too large to be sold off the market will make the market continue to decline.
But this case is more complicated, because 3AC borrows from many different lenders. If 3AC’s position causes lenders to lose money, other investors panic because the market drops withdraw at the same time such withdrawal pressure will cause lenders to panic because they also depend on big borrowers like 3AC .
The projects 3AC has invested
For projects in the years 2019-2021 and 3AC lead round investments. There will be no small impact. Because the majority of tokens of these projects have already been paid. If 3Ac goes bankrupt, they will be forced to sell their investment assets (specifically, tokens from the projects they invest in) to pay off their debt. This will greatly affect these projects and may lead to project collapse.
For Projects invested in 2022, will not have too much impact because often the tokens of these projects will not be paid to private or seed investors. However, this will also create a negative impact on the users of these projects.
Verdict
From the above event, we can draw some lessons as follows:
- Don’t put too much faith in investment funds. In essence, investment funds have unique investment approaches. Additionally, they have a different investment strategy than we do. As a result, we must consider if an investment fund’s investment philosophy aligns with our own. and should only make reference to their portfolio based on their performance and reputation as investors.
- Understanding macroeconomics, to know the impact of economic policies on financial markets. From there, it is possible to develop appropriate investment strategies for each different time.
- Always have backup plans. The market will have events that we cannot expect, such as Terra crashing, stETH losing peg or Three Arrows Capital going bankrupt. Therefore, there must always be plans for the worst-case scenario in the market to protect your investment capital.
Above is Coincu’s entire analysis of the Three Arrows Capital investment fund and why this fund is on the verge of bankruptcy.
If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
Ken. N.
Coincu Ventures
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