One of the biggest crypto funds, Three Arrows Capital, turned to dust in a couple of weeks. Who is to blame for this?
Three Arrow Capital, or 3AC, is a crypto fund that once managed more than $10 billion in assets. Now it has joined the list of cryptocurrencies that have been all but wiped out in this bear cycle. However, the fall of 3AC was not solely a market phenomenon. As more and more details emerge about the company, we can conclude that the lion’s share of the blame for its collapse should be placed squarely on ill-conceived management policies. We go into more detail.
Not long ago, co-founders of cryptocurrency fund Three Arrow Capital got in touch and commented on the reasons behind their company’s collapse. In general, their point of view boiled down to overconfidence in the growth prospects of the coin market. In other words, they were counting on a continuing bull market and were not prepared for a bearish trend.
The LUNA token, which collapsed to zero, deserves a separate mention. Fund representatives said they simply did not expect the possibility of the coin collapsing. And because they had a huge position in it, it hit their own cryptocurrency reserves hard. Read more about the situation in a separate piece.
Why Three Arrows Capital went bankrupt
The crypto fund has made a huge number of failed deals with Bitcoin trust Grayscale units, the Luna Classic token (LUNC) and the Etherium equivalent for steaming from the Lido platform, i.e. stETH. On top of that, 3AC has borrowed from more than twenty large firms.
In May 2022, the crypto market collapsed, causing Grayscale units to trade at a significant discount to Bitcoin’s market price, while LUNC fell to near zero altogether due to the collapse of the altcoin ecosystem.
Most interestingly, just a couple of weeks before LUNC collapsed, a crypto-fund invested $500 million in it - just days later that investment resulted in a 99.99 per cent loss. What followed was a so-called domino effect. As 3AC is a major market player, its financial problems led to a series of bankruptcies among other firms like BlockFi, Voyager and Celsius.
In other words, the cryptocurrency fund 3AC was borrowing money from various companies to conduct its own operations. However, the insolvency of the giant led to the inability to repay certain amounts, which directly affected the ability to conduct operations for these companies.
The collapse of the Terra crypto project
Here’s how Sam Callahan, an analyst at crypto firm Swan, described the fund’s problems in an interview with Cointelegraph.
Using only publicly available information, in my opinion, the failure of 3AC can be divided into two aspects. The first is poor risk management. The second is unethical and potentially criminal behaviour by management. This is a classic example of what happens when you use too much leverage and the trade turns against you. In this case, 3AC borrowed hundreds of millions of dollars – mostly from cryptocurrency lending platforms – to make arbitrage bets in risky DeFi-protocols. One of those risky bets was a bet on Terra.
In other words, the expert makes it clear that the company's management's activism was one of the bases for the problems to arise. If fund representatives had cared more about the risks and the safety of their own positions, the amount of their losses would certainly have been less.
Three Arrows Capital
He added that 3AC failed to admit mistakes, borrowed even more money and “allegedly even used client funds”. It was at this point that 3AC turned into an outright pyramid scheme, the expert said. As market conditions continued to deteriorate and liquidity dried up, 3AC was later exposed. The rest of the story is well known – the crypto fund’s management partially fled and its liquidation process was launched to compensate investors.
The total amount owed by Three Arrows to creditors is currently estimated at $3 billion. The details of all Three Arrows Capital’s management loans have managed to garner a lot of rumours – for example, some experts believe that the fund’s co-founders Soo Joo and Kyle Davies misused some of the funds by trying to buy a luxury yacht for $50 million.
Three Arrows Capital co-founders Soo-ju and Kyle Davies
Overall, the fall of 3AC underscores the fragility of centralised decision-making, which can turn into a nightmare during a bear market. The excessive centralisation in 3AC’s operations came to light only after the fund’s positions began to be liquidated.
Zhu and Davies had earlier said they received a series of death threats after 3AC collapsed, which allegedly forced them into hiding. Both founders admitted that overconfidence born of the bullish trend had led them to a series of bad decisions that should have been avoided.
Three Arrows Capital co-founder Su Zhu
The collapse of 3AC is one of this year's major events in the cryptocurrency world, along with the collapse of the Terra ecosystem. It proves that even professionals who manage billions of dollars need to control risk in their own positions. Otherwise, they will become part of history.
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