One of the largest crypto venture capital firms, Three Arrows Capital, is on the verge of insolvency as it grapples through asset sales and bailouts. The recent condition of 3AC links to all that has happened in the crypto space starting from the collapse of the Terra ecosystem.
As said, Three Arrows Capital has been one of the largest VC funds at one point in time and was managing more than $18 billion in total assets under management. Some of their major investments include Ethereum (ETH), Near Protocol (NEAR), and Avalanche.
What Led to 3ACs Insolvency Risks?
Earlier this month, after the Celsius Networks episode, doubts about 3ACs leverage positions started to emerge. Here’s a look into the turn of events.
- Crypto VC firm Three Arrows Capital (3AC) revealed that they had $245 million of Ethereum (ETH) deposited in the AaveAave protocol. The company used these deposits to borrow $189 million in USDC and USDT thereby putting their Loan-to-Value ratio at 77%.
- Due to the illiquidity of these tokens, as they were locked, 3AC was unable to add collateral or pay off debt. This resulted in a major liquidation cascade. As the market began crashing down, this overuse of leverage left 3AC exposed.
- Things went from bad to worse as reports revealed that 3AC was leveraged long everywhere. This resulted in a major spike in margin calls. The bad thing was that 3AC decided to ghost them instead of addressing them.
- As the liquidity issues further worsened, 3AC sold over 60K staked ETH (stETH). Zhu Su, founder at Three Arrows Capital said that they are fully committed to working it out and are currently in talks with relevant parties.
3ACs Insolvency and LUNA Collapse
Popular crypto analyst Miles Deutscher explains that the beginning of 3ACs insolvency can be directly tied to the collapse of LUNA and UST. He adds that Three Arrows Capital bought money off investors and deposited that into the anchor Protocol. Allegedly, the company used counter-arty funds to build a huge UST position in anchor Protocol without actually informing the investors.
Reportedly, the VC firm bought $560 million of locked LUNA. The value of the same collapsed to a meager $600 after the LUNA collapse. These huge losses led 3AC to further increase its appetite for leverage.
The insolvency risks for Three Arrows Capital could be a disaster for the entire crypto group. 3AC has bought loans from almost every big lender such as Celsius, FTX, BlockFi, BitMEX and Nexo. In case 3AC defaults on its loans, these lenders can take a major hit thereby kicking off a domino effect. Popular analyst Miles Deutscher explains:
Unfortunately, the sheer size of 3AC’s loans spell more trouble than your typical borrower. If you take a $100k loan from a lender, you’re f*cked. If you take a $100m loan from a lender, the lender is f*cked. Unfortunately, a mix of poor risk management, greed and recklessness has lead to insolvency which has severe ramifications for the entire space.