How the fall of Three Arrows, or 3AC, dragged down crypto investors

With more than 19,000 virtual currencies in existence, the cryptocurrency industry has compared the current state of the market with the early years of the internet. However, industry insiders say most of these coins will collapse.

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As recently as March, Three Arrows Capital managed around $ 1[ads1]0 billion in assets, making it one of the most prominent crypto hedge funds in the world.

Now the company, also known as 3AC, is on its way to bankruptcy after the fall in cryptocurrency prices and a particularly risky trading strategy combined to wipe out its assets and leave it unable to repay lenders.

The pain chain can only begin. 3AC had a long list of counterparties, or companies that had their money wrapped up in the firm’s ability to at least stay afloat. With the crypto market down by more than $ 1 trillion since April, led by the fall in bitcoin and ethereum, investors with concentrated bets on firms like the 3AC are suffering the consequences.

The crypto exchange is reportedly facing a hit of 270 million dollars on loans to 3AC. Meanwhile, the digital asset brokerage house Voyager Digital applied for Chapter 11 bankruptcy protection after 3AC could not repay the approximately 670 million dollars it had borrowed from the company. US-based crypto lenders Genesis and BlockFi, cryptocurrency derivative platform BitMEX and crypto exchange FTX are also affected by losses.

“Credit is being destroyed and withdrawn, insurance standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from cryptocurrencies,” said Nic Carter, a partner at Castle Island Ventures, which focuses on blockchain investments.

Three Arrows’ strategy involved borrowing money from the entire industry and then turning around and investing capital in other, often incipient, crypto projects. The company had been around for a decade, which helped give founders Zhu Su and Kyle Davies a measure of credibility in an industry populated by beginners. Zhu also hosted a popular crypto podcast.

“3AC should be the adult in space,” said Nik Bhatia, a professor of finance and business economics at the University of Southern California.

Legal documents reviewed by CNBC show that lawyers representing 3AC’s creditors claim that Zhu and Davies have not yet begun cooperating with them “in any meaningful way”. The filing also claims that the liquidation process has not started, which means that there is no money to repay the company’s lenders.

Zhu and Davies did not immediately respond to requests for comment.

Track the falling dominoes

The fall of Three Arrows Capital can be traced to the collapse in May of terraUSD (UST), which had been one of the most popular stablecoin projects linked to the US dollar.

The stability of UST depended on a complex set of code, with very little cash to back up the event, despite the promise that it would retain value regardless of the volatility of the broader crypto market. Investors were encouraged – on an associated lending platform called Anchor – with a 20% annual return on their UST holdings, a rate many analysts said was unsustainable.

“The risk asset correction combined with less liquidity has revealed projects that promised high unsustainable APRs, resulting in their collapse, such as UST,” said Alkesh Shah, global crypto and digital assets strategist at Bank of America.

Panic sales related to the fall of UST, and its sister token luna, cost investors $ 60 billion.

“TerraUSD and the luna collapse are zero,” said USC’s Bhatia, who last year published a book on digital currencies entitled “Layered Money.” He described the meltdown as the first domino to fall into a “long, nightmarish chain of influence and deception.”

3AC told the Wall Street Journal that they had invested $ 200 million in luna. Other industry reports said the fund’s exposure was around $ 560 million. Regardless of the loss, this investment was made virtually worthless when the stablecoin project failed.

UST’s implosion shook confidence in the sector and accelerated the decline in cryptocurrencies that are already underway as part of a broader risk withdrawal.

3AC’s lenders asked for some of the money back in a flood of margin calls, but the money was not there. Many of the firm’s counterparties, for their part, were unable to meet the demands of their investors, including retail owners who had been promised an annual return of 20%.

“Not only did they not secure anything, but they also evaporated billions of creditors,” Bhatia said.

Peter Smith, CEO of, said last week in a letter to shareholders seen by CoinDesk that the company’s stock market “remains liquid, solvent and our customers will not be affected.” But investors have heard that kind of emotion before – Voyager said the same thing days before it filed for bankruptcy.

Bhatia said the cascade hits any player in the market with significant exposure to a deteriorating assets and liquidity crisis. And crypto comes with so few consumer protections that retail investors have no idea what, if anything, they end up owning.

Customers of Voyager Digital recently received an email indicating that it would take a while before they could access the cryptographer on their accounts. CEO Stephen Ehrlich said on Twitter that after the company goes through bankruptcy proceedings, customers with crypto in the account will potentially get some sort of grab bag of things.

It can include a combination of the crypto they had, common shares in the reorganized Voyager, Voyager tokens and the revenue they can get from 3AC. Voyager investors told CNBC they see little reason for optimism.

SE: Voyager Digital files for bankruptcy amid cryptocurrency lender’s solvency crisis

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