In the past few weeks, there has been more than its fair share of concerning news regarding crypto. In the beginning, there was Terra and Luna. Now that we are in the thick of Celsius Crypto, fighting for survival. There is also the USDD, which is working to prevent another de-peg. This ongoing tale can now include the company known as 3 Arrows Capital.
According to “well-placed sources” who spoke with The Block Reporter Frank Chaparro, the digital currency hedge fund known as Three Arrows Capital (3AC) may be nearing insolvency due to extensive liquidations. According to sources, the 3AC “liquidation amounted to at least $400 million,” and on Tuesday evening, the hedge fund’s CEO Su Zhu tweeted about “communicating with relevant parties” (ET).
At this point, it appears as if companies will continue to decline. Weird things seem to be taking place. Is there a common thread that connects all of these stories? Let’s have a closer look at 3 Arrows Capital from a new angle.
3 Arrows is a hedge fund. One of DeFi’s biggest borrowers. Two friends founded the company in 2012. New York’s Columbia University was their alma mater. Su Zhu, Kyle Davies. They have good risk-adjusted returns. From their website. The company is based in Singapore. Dubai was in the cards.
At the market high, they held $10 billion in bitcoin. A Bloomberg report cited Nansen Analytics. Their website lists Bitcoin, Ethereum, Avalanche, Near, and Terra. Later on.
They possess DeFi cash. Such as Aave, Balancer, DYDX, Trader Joe, and Lido. Again, more soon. BlockFi and Starkware are among their stocks. They also have Axies and Crypto Raiders in gaming funds.
It shows where they invest. Remember that this is just a sample of their collection. On paper, this is a decent, diverse portfolio. But two names stick out. Terra and Lido frown. We’ll check into the market given the present conditions.
Hedge funds are actively managed investment pools whose managers employ a variety of tactics, frequently including borrowing money and trading exotic assets, in an attempt to outperform average investment returns for their investors. They are regarded as risky alternatives to conventional investments.
The high minimum investment or net worth required by hedge funds excludes all but the wealthiest clients.
“Hedge fund” helps explain. Any traditional investment fund manager can hedge some assets. This is a gamble against the fund’s focus to offset losses in its main holdings.
A fund manager who concentrates on a cyclical industry that does well in a flourishing economy, like travel, may invest in non-cyclical sectors, like food or power. Non-cyclical stocks should counter-cyclical losses if the economy falls.
Hedge fund managers have modernized this approach. Except for a few who cling to the standard long/short stocks paradigm, their funds have little to do with hedging.
Base Foundation Is Shaking
In May, the initial rattling of their foundation began. Luna and Bitfinex are responsible. According to the Crypto Twitter handle FatMan, who operates a LUNA validator, 3 AC had locked $10.9 million in Luna. This was worth approximately $560,000,000. It is now worth $670.45. This is difficult to accept, even for Three Arrows Capital.
To make matters worse, the well-known crypto reporter Colin Wu tweeted a message. In this section, he describes a 3 AC loss of $31.3 million on Bitfinex in May 2022.
This will vary with the subsequent exposure. This is about to cause some commotion. The transparency of on-chain transactions is extraordinarily beneficial. In times such as these, it is just what we seek.
Something Is Not Quite Right
Twitter crypto analysts note 3 AC’s two loans. $245 million Aave and $35 million Compound loan. Nansen’s wallet is cited by Midas The Fool and Onchain Wizard. Nansen deleted this wallet’s mark. This wallet is slowly repaying Aave. They’ll liquidate at $1,030-1,040 ETH. Surprise! Ethereum fell to $1.024. 3 AC is still fighting. Researchers later attributed this wallet to a whale. He’s Cai Wensheng.
3 AC is silent regarding these loans. Su Zhu tweeted something strange. It mentions “contacting relevant parties.” These parties remain unknown.
Su Zhu’s tweet hints that something is amiss at 3 AC. The Twitter username Moon Overlord is supported by substantial evidence. Among other things, he notes that Zhu removed all coins and # tags from his bio. He canceled his Instagram account. This, however, pales in comparison to this tweet.
Additionally, Midas The Fool identifies a second wallet as belonging to three AC. This time, Compound is being liquidated for $3.74 million. That totals 3,362 ETH. There is no evidence to suggest that this wallet belonged to 3 AC. Here is the Etherscan evidence.
All Problems Stem from Liquidity
Now joining Terra Luna, Celsius, and Tron/USDD is 3 AC. They all share the same fundamental issue. Lack of liquid assets. Their product is not inherently inferior. For example, Celsius. Numerous crypto community members are now pulling for them. They desire that they overcome the shorting placed against them. Alternatively, if they are successful, we hope they have learned from their mistakes. But we’re digressing.
Returning to the liquidity problem. Again, Celsius is used as an example. They have contracts for long-term assets, like mining or staking ETH2. However, these do not correspond with their immediate commitments. Such as loans and redemptions. In their terms, the latter does not correspond to the mining and staking plans. This is illustrated by the following example. If you invest funds for two years but have an increase in withdrawals that must be met immediately, you will need to find an alternative investment strategy. You now have terms that do not correspond.
A bear market can make this worse. People may be more inclined to sell and redeem. All stated projects have similar liquidity difficulties. The key question is whether or not this liquidity mistake will be followed by others.
This raises an additional intriguing topic. How will this impact the initiatives in which they have invested? Will there be a domino effect, with further projects falling if redemption demand is not met? What if 3 AC goes down?
Trader Joe has already stated that the company is in the clear. According to their understanding, 3AC has not been actively yield farming on $JOE for many months. Another one of their quotes states this. “To put things in perspective, community members own more $JOE than our venture capitalists.”
However, not all projects will experience the same circumstance. 3 Arrows Capital is involved in DeFi financing with virtually everyone and their dog. The lenders maintain at least a liquidation reserve. This might potentially affect some players in whom 3 AC had invested.
This article demonstrated how Three Arrows Capital is the next cryptocurrency venture to encounter difficulties. Some of the information used was speculative. Similarly, for some wallets, we cannot establish with absolute certainty that they belong to 3 AC. In contrast, the general perception is that they are in peril. In his tweet, Su Zhu hinted to this.
A lack of money is the primary cause of all crypto ventures’ recent difficulties. If companies like 3 Arrows Capital fail, this is negative for crypto in the short run. It might potentially delay more developments. On the other hand, this will benefit cryptocurrencies in the long run, and their value will increase more rapidly than previously.
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