Three Arrows Capital May be Liquidated and Cause a Crisis. Why is the Top Crypto VC in Such a Situation?

1. Since the 14th, there have been rumors that Three Arrows Capital has encountered a liquidity crisis, a large number of funds are on the verge of liquidation, and even bankruptcy may occur.

2. The current lack of liquidity of Three Arrows Capital is mainly caused by the overall decline of the market and a number of failed investments recently.

3. It is reported that Three Arrows Capital has locked up 10.9 million LUNAs at a price of $559.6 million. Now, with the return of LUNA to zero, this huge amount of investment has shrunk to one millionth, leaving only approximately $670.

4. Considering the poor liquidity of major assets of Three Arrows Capital, including GBTC, stETH, etc., the way of covering positions of Three Arrows Capital may not be smooth.

5. It is estimated that the clearing price of Three Arrows Capital's relevant positions on Aave has decreased to $1,016.


The Fed raised interest rates, LUNA returned to zero, Celsuis collapse, and stETH depeg and other ensuing negative news gradually pushed the entire crypto market to the freezing point. But things are far from over. The situation still seems to be going in a bad direction. Since the 14th, there have been rumors that Three Arrows Capital, one of the largest VC institutions in the crypto field, has encountered a liquidity crisis, and a large number of funds are on the verge of liquidation, and may even go bankrupt.

On the morning of June 15, Zhu Su, founder of Three Arrows Capital, tweeted that "we are communicating with relevant parties and committed to solving relevant problems." This tweet implicitly responded to people's concerns about the liquidation issue of Three Arrows Capital, but also made the entire crypto community worried. Is Three Arrows Capital really going to go bankrupt?


In the bear market with generally lower prices, the phenomenon of position explosion is not uncommon, but considering the huge volume of Three Arrows Capital, this liquidation crisis is still shocking. With the continuous disclosure of on-chain data and exchange account data, the story of Three Arrows Capital falling from heaven to hell has been gradually revealed.


The higher the bull market goes, the harder the bear market falls

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Three Arrows Capital (3AC), headquartered in Singapore, was co-founded by Zhu Su and Kyle Davies in 2012. In 2017, Three Arrows Capital transformed its main investment in the crypto field, and made a lot of money by investing in Bitcoin and Ethereum, rapidly growing into one of the largest VC companies in the crypto field. As of April this year, Three Arrows Capital has at least owned crypto assets worth more than $10 billion.

However, the bear market in the crypto market is as crazy as the bull market. The rough investment style of Three Arrows Capital makes them soar in the bull market, but it is enough to cause them to drop in the bear market. The current lack of liquidity of Three Arrows Capital is mainly caused by the overall decline of the market and the recent failure of 3AC's many investments.

According to the documents submitted by Three Arrows Capital to the US Securities and Exchange Commission (SEC) in january2021, Three Arrows Capital is the largest holder of the Grayscale Bitcoin Trust (GBTC), with a position of 38.88 million shares, accounting for approximately 6.1% of the total share of GBTC. With the decline of Bitcoin price, the GBTC price has a negative premium of more than 20%, and the value of these GBTC assets has also decreased significantly, resulting in a large deficit for Three Arrows Capital.

After the dispute between Zhu Su and Ethereum at the end of 2021, Three Arrows Capital also became a supporter of the emerging Layer 1 public chain such as Solana, Avalanche, Terra, etc. However, with the arrival of the crypto bear market, the value of SOL, AVAX and other currencies has dropped by more than 80%, and LUNA has returned to zero directly. On June 13, Zhu Su also deleted certain tokens about ETH, AVAX, LUNA, SOL, NEAR, etc. from his Twitter introduction, leaving only Bitcoin, which is tough to hear.


In February 2022, Luna Foundation Guard (LFG) announced that it had completed the financing of $1 billion. In addition to JumpCrypto, the two leading investment institutions are Three Arrows Capital that is now in trouble. This financing was completed by the OTC transaction LUNA. It is reported that Three Arrows Capital locked up 10.9 million LUNAs at a price of $559.6 million. Now, with LUNA returning to zero and renamed as LUNC, this huge amount of investment has also shrunk to one millionth, leaving only approximately $670. According to Bitfinex trading data, Three Arrows Capital is listed in the deficit list of the exchange. In Bitfinex alone, Three Arrows Capital incurred a realized loss of $31.37 million.


The more direct crisis of Three Arrows Capital comes from the upcoming liquidation. In the previous bull market, Three Arrows Capital used the leverage between stETH and ETH to buy chips for itself. Presently, Three Arrows Capital has staked more than 210000 ETH on AAVE, and these assets may be liquidated at any time due to the further decline of ETH price. In addition to the leveraged investment in the DeFi sector, Three Arrows Capital also borrowed heavily through leverage on other lending platforms. It is reported that the total clearing amount of Three Arrows Capital has reached $400 million on Deribit, BlockFi and other platforms.

For leveraged investment between stETH/ETH, please refer to our previous blog post: stETH Depeg Crisis | Will Ethereum Repeat Luna‘s Mistakes?


Collect funds to avoid liquidation

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According to the recent on-chain data, Three Arrows Capital has exchanged its own stETH back to ETH at a loss price (the exchange rate is approximately 0.94) and further converted it into DAI. The average transaction price of Ethereum is approximately $1,200, and the total transaction amount is nearly $20 million. Subsequently, Three Arrows Capital exchanged 38,900 stETH in its wallet address for 36,718.64 ETH, with the exchange rate of only 0.944. In addition, there is news that Three Arrows Capital is misappropriating user assets without permission. On June 15, some Twitter users said that their $1 million in the capital trading account of Three Arrows Capital was withdrawn for use. All these show that Three Arrows Capital is using all means to collect available funds for covering positions. However, considering the poor liquidity of stETH and GBTC assets, the way of covering positions of Three Arrows Capital may not be smooth.

The liquidation of Three Arrows Capital position may have begun. On June 15, the prices of Bitcoin and Ethereum continued to fall, keeping the round mark of $20,000 and $1,000 respectively. According to the detection of the blockchain security team PeckShield, on June 15, a wallet address (0x716034C25D9Fb4b38c837aFe417B7f2b9af3E9AE) suspected to belong to Three Arrows Capital was liquidated four times at 16:00 and 17:00 Beijing time, 8，511, 3，346, 1，716 and 2，681 ETH respectively, with a total of 16,254 ETH.


According to the estimation of OnChainWizard, a Twitter user, the clearing price of Three Arrows Capital's relevant positions on AAVE has decreased to $1,016.



Conclusion

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Considering the huge volume Three Arrows Capital has, once Three Arrows Capital goes bankrupt, it will have an incalculable impact on the entire crypto market. We will continue to keep an eye on whether this huge amount of assets will crush and whether Three Arrows Capital can survive this crisis.



Author: Gate.io Researcher: Edward H. Translator: Joy Z.
* This article represents only the views of the researcher and does not constitute any investment advice.
*Gate.io reserves all rights to this article. Reposting the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.



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