Crypto had its share of alarming news during the last few weeks. First there was Terra/Luna. Now we are in the middle of Celsius crypto, trying to survive. There’s also USDD trying to avoid another de-peg. Now we can add 3 Arrows Capital to this continuing saga.
Companies keep going down or look at least as if they will. What is going on? Is there a common denominator? Let’s have an in-depth look at this latest struggle at 3 Arrows Capital.
Who Are 3 Arrows Capital?
3 Arrows Capital is a hedge fund. The company is one of the biggest borrowers in DeFi. Two classmates established the company in 2012. They attended Columbia University in New York City. These are Su Zhu and Kyle Davies. They provide superior risk-adjusted returns. That is according to their website. Currently, the company bases itself in Singapore. However, a move to Dubai was in the cards.
During the market peak, their crypto holdings were around $10 billion. As a Bloomberg article stated, citing the Nansen analytics firm. According to their website, their crypto holdings include; Bitcoin, Ethereum, Avalanche, Near, and Terra. More on the latter later.
They also hold DeFi funds. For example; Aave, Balancer, DYDX, Trader Joe, and Lido. Once again, more on the latter later.
In equities, they hold, for instance, BlockFi and Starkware. And lastly, they hold various fund assets in gaming where they hold Axies and Crypto Raiders.
Source: Three Arrows Capital
This gives an idea of what they invest in. Keep in mind that this is just a selection of their holdings. On paper, this looks like a nice, solid, and diversified portfolio. However, two names stick out like a sore thumb. Terra and Lido raise eyebrows. Given the current market circumstances, we will look a bit deeper into them.
Rattling the Foundation
The first rattling of their foundation started in May. Luna and Bitfinex are the culprits. According to Crypto Twitter handle FatMan (who runs a LUNA validator), 3 AC had $10.9 million locked Luna. That was worth around $560 million. Now it’s worth $670.45. That’s hard to swallow, even for Three Arrows Capital.
If you're ever feeling down or angry at yourself about UST/LUNA, don't beat yourself up too much over it. It was highly sophisticated deception. A lot of brilliant minds fell for it.
For example, Three Arrows Capital bought 10.9M locked LUNA for $559.6m – it's now worth $670.45.
— FatMan (@FatManTerra) June 14, 2022
To make things worse, Colin Wu, a well-known crypto reporter, had a message on Twitter. Here he mentions a 3 AC loss of $31.3 million on Bitfinex trading in May 2022.
But that’s not all, folks. There is more where this came from. We did, however, establish that the foundations at 3 AC are shaken, but not stirred.
That is about to change with the next exposure. This is about to stir things up a bit. The transparency from on-chain transactions works wonders. At times like this, it’s precisely what we are looking for.
The Wrong Wallet?
Crypto analysts on Twitter mention that 3 AC has two big outstanding loans. We are looking at a $245 million Aave and a $35 million Compound loan. Midas The Fool and Onchain Wizard have been quoting a wallet marked by Nansen. However, Nansen removed the mark on this wallet. Nonetheless, this wallet is paying off the Aave debt, bit by bit. They should get liquidated around the $1,030-$1,040 mark of ETH. Well, guess what? Ethereum dropped to $1.024 on June 15th. Still, 3 AC seems to be in the ring, fighting. Later, Twitter researchers assigned this wallet to a whale. They named him as Cai Wensheng.
There is, however, dead silence in the 3 AC camp about taking out these loans. Su Zhu sent a mysterious tweet. It mentions “communicating with relevant parties”. Who these parties are, remains unknown for the time being.
We are in the process of communicating with relevant parties and fully committed to working this out
— Zhu Su 🔺 (@zhusu) June 15, 2022
Something Is Off
The tweet by Su Zhu indicates that something is off at 3 AC. Twitter handle Moon Overlord comes with some solid proof. Among others, he points out that Zhu took every coin and # tag out of his bio. He also deleted his Instagram. But, this is peanuts compared to this tweet.
people think Celsius is the biggest stETH dumper but its 3AC and it isnt relatively close, they are dumping on every account and seed round address they have, most looks like its going to payback debts and outstanding borrows they have pic.twitter.com/9bZnmTXQzj
— moon (@MoonOverlord) June 14, 2022
We like to show the picture that goes with the tweet as well.
Furthermore, Midas The Fool fingers another wallet as belonging to 3 AC. This time it’s a liquidation on Compound of $3.74 million. That’s 3,362 ETH. Be aware that there is no confirmation that this wallet belongs to 3 AC. Here’s the Etherscan proof.
More Problems With stETH
That brings us to the next step. Back to Moon Overlord. He mentions that 3 AC may have transferred 30,000 stETH. They use this to pay off the Aave debt.
stETH is Lido Staked Ethereum. You lock the Ethereum in Lido but receive the stETH token in return. You can swap this stETH 1:1 to ETH once the Merge takes place. However, stETH de-pegged from ETH. It is around 6-7% short of the ETH price. Besides a great arbitrage opportunity, this doesn’t help 3 AC.
It also doesn’t take the calculation into account that both ETH and stETH dropped in price. They’re down 41% over the last 30 days, according to CoinGecko.
On the other hand, Blockworks mentions that 3 AC started to withdraw stETH in May. Straight after the Terra collapse. On June 14th, they took another 81,000 stETH from Aave. That was around $92 million. They traded 38,900 stETH for 36,718 ETH on Ox. That’s $43.9 million, but at a 6% loss.
In the meantime, some of their customers are becoming unhappy. Danny Yuan, the head of trading at 8Blocks Capital, had a Twitter thread. They invest in the metaverse and DeFi. He explains that they had an agreement with 3 AC. This meant that 3 AC would never move their funds without permission. Around June 13 or 14 it seems that 3 AC used $1 million of 8Blocks fund to answer a margin call.
We’re not done yet, though. Now their NFTs need to come to the rescue. So, let’s see what is happening there.
NFTs to the Rescue?
Three Arrows Capital has a few NFT collections. For example, an Art Blocks Curated collection. They also have collections on SuperRare and Foundation. These collections are now on the move. See the Etherscan link, and look under ERC-721 and ERC-1155 tokens.
Kyle Waters, a Twitter researcher, made a thread about this. He states that 3 AC moved a collection of 70 pieces. They spent around $21 million on this collection. The collection comes from Starry Night Capital. Three Arrows Capital launched this in the summer of 2021. For one-piece, they paid $1 million. Open the Tweet below to see it.
💎 AI Generated Nude Portrait #7 Frame #184 💎
— SuperRare Bot 💎 (@SuperRareBot) October 5, 2021
Michael Tant is co-founder and partner of CitizenX crypto. He is a crypto investor, specializing in Web 3. His Twitter thread from last year shows some NFTs that 3 AC bought. They also made good profit on them. However, currently the floor prices of NFTs seem to be down for many collections. For example, BAYC lost around 50% of its floor price value. This sits currently around 70 ETH, from 142 ETH.
So, this, again, doesn’t bode very well for Three Arrows Capital. The floor prices of NFTs are dropping. On the other hand, if they start to scramble for $21 million, their need for liquidity appears to be high indeed. Let the lack of liquidity be one of the issues with NFTs. To clarify, a collection of this magnitude should sell fast.
This brings us to the next sore point. All crypto firms currently in rough waters have the same issue. That issue is liquidity.
Liquidity Is at the Base of All Problems
Terra Luna, Celsius, Tron/USDD, and now 3 AC. They all have the same core problem. A lack of liquidity. Their product is not necessarily bad. For example, Celsius. Many folks in crypto are now rooting for them. They want them to beat the shorting put in place against them. On the other hand, if they manage to do that, we also hope they learned their lessons. But we’re digressing.
Back to the liquidity issue. We take Celsius as a sample again. They have long-term asset arrangements, like mining or staking ETH2. However, these don’t line up with their short-term obligations. For example, loans and redemptions. The latter don’t match the mining and staking plans in their terms. What we mean with this, is the following sample. If you lock funds away for 2 years, but you have an increase in redemptions that you need today. Now you have terms that don’t match up.
A bear market can worsen this. More people may want to sell and redeem. All mentioned projects have similar liquidity issues. The real question is, will there be more to follow down this liquidity pitfall?
Does This Affect the Projects That 3 AC Invested In?
This brings up another interesting question. How will this affect the projects they invested in? Will there be a domino effect, with more projects tumbling if they can’t meet redemption demand? What if 3 AC goes down?
Trader Joe already mentioned that they are in the clear. They stated that 3AC to their knowledge is not actively yield farming on $JOE for many months. Another quote by them says this. “To put things in perspective, there are community members who own more $JOE than our VCs.”
We would also like to add that the % supply of $JOE owned by VCs is very tiny.
— Trader Joe🔺 | We are hiring! (@traderjoe_xyz) June 15, 2022
However, not all projects will be in a similar situation. 3 Arrows Capital is lending with almost everybody and his dog in DeFi. The lenders have at least a liquidation in place as a buffer. This could well impact some players that 3 AC had invested in.
We showed you how Three Arrows Capital is the next crypto project in trouble. Some information we used is speculation. Like, for some wallets we can’t confirm for 100% that they belong to 3 AC. On the other hand, the consensus is that they are in trouble. Su Zhu hinted at this in his tweet.
We also had much more sturdy evidence that 3 AC is in trouble. This we showed you, with tweets, pictures, and links as proof.
The main culprit for all crypto projects that faced issues recently, is a lack of liquidity. We are about to write an in-depth article on this topic shortly. Stay tuned for that.
If companies like 3 Arrows Capital go down, that is not good in the short term for crypto. It may even drag down some more projects. However, in the long term, it will benefit crypto, and it will rise stronger than before.
⬆️Moreover, for more cryptocurrency news, check out the Altcoin Buzz YouTube channel.
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