The fear is palpable.
Six weeks after Terra collapsed and one week after Celsius, the embattled crypto bank, suspended withdrawals, investors are anxiously watching a $10B hedge fund cope with serious stress.
Three Arrows Capital is sitting on what are believed to be billions of dollars worth loans secured by cryptocurrencies. With the market down 56% this year in its worst bear market since 2018, investors believe the collateral no longer supports the loans. Now the fund is on the hook to start paying them back, and everyone is wondering whether it will default.
On Wednesday, The Defiant reported that Three Arrows sold at least $40M worth of staked Ether as part of an apparent liquidation. It is widely believed that co-founder Su Zhu has been aggressive in using leverage to maximize his potential investment returns.
“If 3AC were to become insolvent, it would be catastrophic,” The DeFi Edge, an investor with 175,000+ followers on Twitter, told The Defiant. “Zhu believed in the super cycle and used a ton of leverage to increase their position size.If the firm cannot pay off its positions, it’ll force more liquidations.”
Three Arrows has not responded to requests for comment by The Defiant. On June 15, Zhu alluded to the fund’s troubles in a tweet.
“We are in the process of communicating with relevant parties and fully committed to working this out,” he said.
In the meantime, crypto players have been poring over blockchain data and analysis to garner some sense of Three Arrows exposure, and what might happen next.
On June 15, Danny Yuan, Head of Trading at 8 Blocks Capital, tweeted that Three Arrows removed nearly $1M from his firm’s trading account. The two companies worked together for 1.5 years, but Yuan explained that when his team tried calling 3AC’s Operations Team about the $1M withdrawal, they ignored their calls.
“What we learned is that they were leveraged long everywhere and were getting margin-called,” Yuan tweeted. “Instead of answering the margin calls, they ghosted everyone. The platforms had no choice but to liquidate their positions, causing the markets to further dump.”
Three Arrows, which is based in Singapore, has become a force in DeFi by backing some of its most important platforms. It’s invested in Solana, Avalanche, Aave and Terra, as well as GameFi names such as Axie Infinity and NFTs.
Zhu made his name as a crypto bull championing the idea of a “super-cycle” in which Bitcoin would hit $2.5M and become a new form of gold. He believed the digital assets market would sidestep a bearish turn thanks to blockchain innovation.
On May 27, with the market cratering after Terra’s stablecoin, UST, lost its peg, Zhu admitted he was wrong. “Supercycle price thesis regrettably wrong,” he tweeted. “But crypto will still thrive and change the world everyday.”
Now investors are wondering, and hoping, that Three Arrows survives. If it can’t service its debts that would be a severe blow to a market already struggling to find its footing. Yet it’s hard to get a bead on precisely what’s going on inside the firm.
Just like TradFi hedge funds, Three Arrows doesn’t share much about its inner workings. What is certain is the fear its struggles are triggering in the marketplace. “When everyone’s rushing for the most liquid thing in the room, the leverage gets unwound and just triggers the next domino,” Messari analyst Chase Devens told The Defiant.