Three Arrows Capital, which was once a top-tier VC, has gradually ushered in its own end after the disorderly expansion of abundant liquidity in the bull market.
The rout of Three Arrows Capital
Three Arrows Capital is one of the crypto-focused venture capital firms and was once regarded as a crypto upstart. Their best investments include: Avax, Near, Derabit, Starkware, Terra Luna, Axie Infinity, with assets under management estimated at Between 10 billion and 18 billion US dollars, it has far-reaching influence and prestige in the industry. The founder, Zhusu, is also very influential. He once published an article maliciously slandering ETH, which caused the price of ETH to drop, and then he bought a lot of ETH at a low price.
And more recently, with the collapse of Terra Luna, the losses suffered by Three Arrows Capital have put pressure on the crypto company. It is reported that before the collapse of Terra, Three Arrows Capital spent about $560 million to purchase 10.9 million LUNA and pledged them on the chain. Later, it was reported that in order to make up for the debt brought on Terra, Three Arrows Capital sold stETH. Subsequently, the panic caused by its selling of stETH directly collapsed the overall market, making Sanjian Capital’s debt closer to the liquidation line, forcing the sale of larger positions to prevent liquidation and liquidation, forming an industry chain reaction that further exacerbated liquidation.
Then, Danny of the well-known market maker 8 blocks capital exposed on Twitter, and Three Arrows capital openly took user funds for other purposes. The funds of these market makers are also leveraged funds, and a margin call has been notified due to the downturn in the market. However, due to the unresponsiveness of Three Arrows Capital, some funds were already liquidated, which prompted further market selling. In addition, multiple DeFi protocols claim that the whereabouts of their funds deposited on the Three Arrows Capital OTC platform are unknown. The chain reaction failed to recover the market, and Three Arrows was quickly liquidated on its undercollateralized loan by a large undisclosed lender.
The analysis pointed out that the total liquidation of Three Arrows Capital on lending platforms such as Deribit and BlockFi reached 400 million US dollars. According to the data of the US SEC, as of March 31, 2022, Three Arrows Capital has assets equivalent to 38,888 BTC in GBTC, and the huge assets of Three Arrows Capital are trapped in GBTC. According to The Block’s document, the OTC platform of Three Arrows Capital promoted GBTC-related arbitrage transactions to investors before the crisis broke out. It seems that Three Arrows urgently needs to sell the GBTC in its hands. The assets owned by Three Arrows Capital are illiquid. When the investment fails or the user cannot take out the collateral or respond to the user’s redemption, they encounter a serious liquidity crisis.
The chain reaction continues
After the incident, Kyle Davies, founder of Three Arrows Capital, said in an interview that the collapse of Terra caught us off guard, and we could accept the losses caused by the collapse of Terra, but then a series of events caused by the collapse of BTC 0.04%-news/">Bitcoin, ETH and other cryptocurrencies caused More questions. We are not the first to be hit, there are many other companies affected by the Terra debacle.
Subsequently, an anonymous person further reported Three Arrows Capital, which accelerated its rout. An anonymous person, 3AnonCompany, said in an article that Three Arrows Capital has preferred unsecured loans since its establishment in 2018, providing customers with structured credit products with a yield of 10%-15%. Crash before overturning. Three Arrows has been serving clients in Singapore, China and Hong Kong, but they are not licensed or regulated. Lenders include small trading platforms, individuals and companies, and Sanjian has always expertly misappropriated clients’ money when dealing with counterparties, as if they were using their own. Three Arrows currently has outstanding debts totaling more than $2 billion, but only 200 million in liquid assets (poor liquidity, difficult to assess), and companies such as Galaxy, Blockfi, Genesis, FTX, BitMEX, Binance, Bifinex, Tether, Bybit and All platforms have bad debts from Three Arrows Capital.
The debt of Three Arrows Capital is still further increasing. Terra researcher FatMan said on social media that Three Arrows Capital may have been suspected of breaking the law during the forced liquidation process (8 Blocks Capital previously accused Three Arrows Capital of misappropriating at least $1 million of its funds). In addition, FatMan expects that most of Three Arrows’ current assets are illiquid equity investments targeting Deribit and Starkware. With estimated assets of $400 million and debt of $2 billion, its net worth is estimated at $1.6 billion.
It is worth mentioning that BlockFi is currently valued at less than $500 million and has lent $1 billion to Three Arrows Capital. In this context, FTX is also looking to acquire the cryptocurrency trading and lending platform BlockFi.
And crypto broker Voyager Digital also announced a default notice to Three Arrows Capital for failing to repay previously disclosed loans of 15,250 BTC and 350 million USDC. Voyager plans to seek compensation from Three Arrows and is discussing available legal remedies with the company’s advisers.
In addition, a court in the British Virgin Islands ordered Three Arrows to be liquidated. Crypto industry insiders say the liquidation will be a momentous moment in the disintegration of the current cryptocurrency industry, which has grown at an alarming rate in recent years. It is unclear what immediate financial impact the liquidation will have on Three Arrows’ creditors. But the company’s collapse could raise further questions about the regulatory oversight of cryptocurrencies and other digital assets in the world’s major financial centers.
Multi-agency sever ties
Under the chain reaction, many institutions have also issued statements to clarify their relationship with Three Arrows Capital to prevent users from running.
Avalanche AVAX -1.56% clarified on social media in response to market speculation sparked by the recent liquidation of Three Arrows Capital, which has never managed, used or hosted any of the Avalanche Foundation’s treasury funds in any way.
Crypto lending firm Hodlnaut said it had no exposure to Three Arrows Capital and would not halt withdrawals despite the outflow.
Crypto lending platform Nexo officially tweeted: “Nexo has zero exposure to Three Arrows Capital. Nexo rejected Three Arrows Capital’s unsecured credit request 2 years ago. All Nexo and Three Arrows Capital did is their NFT. The fund signed the partnership, but it didn’t work out, and we currently have $0 in business and risk with Three Arrows.”
The decentralized liquidity protocol Kyber Network tweeted that although Three Arrows Capital had purchased KNC in an over-the-counter transaction with the Kyber Treasury, the amount of KNC purchased by Three Arrows Capital was not large, and it had been purchased from Three Arrows Capital a long time ago. Transfer out of the receiving wallet. Therefore, Kyber Network does not believe that Three Arrows Capital still holds KNC purchased from the Kyber treasury, and if it did, these KNCs would not be part of the liquidation of Three Arrows Capital’s assets. In addition, Kyber Network stated that the potential bankruptcy of Three Arrows Capital may have some impact on Kyber’s financials, as a small part of Kyber’s assets is in Three Arrows Capital, but its treasury can still support the development of Kyber for many years. Kyber Network said its long-term plan has not changed, and will not lay off staff, and continue to expand the Kyber team.
Decentralized derivatives exchange dYdX issued a statement on the recent Three Arrows Capital event: Although Three Arrows Capital is an investor in dYdX, dYdX’s liquidity and trading business will not be affected by the current and future conditions of Three Arrows Capital.
In recent weeks, the crypto industry has been “smashed” by an “old-fashioned Madoff-style Ponzi scheme,” research firm FSInsight said in a recent report examining the impact of Three Arrows’ implosion. The report further stated that Sanjian’s AUM exceeded $18 billion at its peak. But it’s unclear how much of the actual equity capital is at risk, given the amount of debt currently known to have been lent to the company. The report also said that Su Zhu and Kyle Davies were likely simply “using borrowed funds to repay interest on loans made by lenders while ‘tampering with the books’ to show huge returns on capital”.
