What to expect next after the Three Arrows Capital collapse

The combination of the degen trade, lack of transparency, and unfavorable market conditions has resulted in an unflattering end for the insolvent crypto VC firm.

A stock photo of a sinking piggybank.

One of the largest crypto venture capital funds, Three Arrows Capital, has recently found itself on the verge of bankruptcy. Established in 2012, it was founded by Wall Street traders Su Zhu and Kyle Davies with just $1.2m. Shortly before Terra’s collapse in mid-May, 3AC had roughly $3b in assets under management. And then the market plummeted.

Some of 3AC's major investment positions included Ethereum (ETH), Near Protocol (NEAR), and Avalanche. The fund also participated in the $1b token sales by Luna Foundation Guard, purchasing $200m worth of Luna. The money was effectively wiped out after the price of Luna dropped to $0.3 from $80.

In his interview with The Wall Street Journal, Davies admitted that “the Terra-Luna situation caught us very much off guard,” but added that 3AC was able to withstand the Luna losses, but the subsequent cascade of events undermined the fund’s solvency.

Indeed, 3AC has bought loans from almost every big lender, including FTX, BlockFi, BitMEX, Nexo, Voyager, and an already falling Celsius. Voyager’s management disclosed in an open letter to investors that the company lent approximately $655m to the insolvent fund and will issue a notice of default if Three Arrows fails to repay the loan by June 27. Following the news, Voyager’s stock dropped over 50% in a 24-hour period; the company had to get a $500m loan from Alameda Capital to safeguard customers’ assets.

According to the Twitter user @FatManTerra, who previously accused Terra’s Do Kwon of operating shadow wallets, 3AC had a massive margin long on BTC with a liquidation price of around $24k. The loan was kept secret, as no one believed the price would go that low. When asked to add collateral, the fund went silent, facing an inevitable margin call. In a desperate attempt to save the situation, 3AC solicited BTC loans from other big players, lying about the fund’s AUM and promising a 20% yield.

In early 2021, Su Zhu has been really vocal about his “growth supercycle model,” where the ongoing worldwide adoption continually drives crypto prices to the new all-time highs. However, witnessing the May market drop, he admitted he had been terribly wrong. “Supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day,” Zhu tweeted.

The question arises whether 3AC insolvency was the case of a degen aping or a deliberate plot. On the one hand, the recent market nosedive revealed that the big players make the same rookie mistakes as crypto newcomers, with Novogratz’s Luna tattoo and Saylor’s BTC loan being the perfect examples. On the other hand, Su Zhu reportedly bought a $50m superyacht with money from a loan he knew he was unable to pay. The FatMan believes that 3AC may be involved in something illegal, especially in its final days.

The anonymous whistleblower also advised investors to withdraw their money from the centralized yield services like BlockFi, Voyager, and Nexo to the self-custody wallets. “This sort of contagion can ripple out for weeks, and we still don't know who was affected and to what extent. The best part is, when the dust settles, you can always redeposit into your favorite platform without issue. Wait a month or two and see how everything plays out,” they tweeted.