US investment fund Three Arrows Capital could be the next crypt-giant to fall after Terra and perhaps Celsius. The big difference is that this investment fund was widely trusted and respected, not for its brilliant ideas or blockchain applications, but purely because of its liquidity. And that is precisely where things seem to be going wrong now.
Meanwhile, bitcoin has fallen 9% in the past 24 hours, and there seems to be no end to the pain. Later today, our analysts share their views on the market and the price.
Is Three Arrows Capital liquid enough?
Three Arrows Capital (3AC) has reportedly failed to meet margin calls from its lenders, leading analysts and the market to believe that 3AC did not have as much liquidity as thought. The collapse of the crypto market has caused unforeseen liquidations (of financial positions, not of people).
Basically, 3AC is an investment company that invest their money or borrowed money in crypto companies. So they borrow cryptocurrency or money from lenders, but for this, they have to deposit collateral. For example, the collateral can consist of crypto and stablecoins or fiat money as well. If the value of the collateral decreases while they have a loan outstanding, the collateral must be replenished. Some lenders do not trust 3AC to meet these margin obligations because of insufficient liquidity.
Investments grow, but are not liquid
Over the years, the investment company has made many fantastic investments. For example, they were able to invest very early in various altcoins that were still worthless at the time but have mostly gone up times 100 and even times 1000. The problem is that many of these coins and investments are tied up for long periods of time and so cannot be sold. The value of these coins is enormous, but they are of little use if they are not liquid.
This means that if 3AC needs to deposit money to increase the collateral of their loans, they cannot do so with their investments. That is why BlockFi liquidated the positions of 3AC, the investment fund simply did not manage to get liquidity.
Did BlockFi close 3AC’s position?
Crypto money lender BlockFi is one of the companies which, according to the Financial Times, has liquidated at least some of 3AC’s positions. The newspaper used anonymous sources for this, but the information is somewhat confirmed by Zac Prince, the director of BlockFi. Because he did not directly name 3AC, but everyone knows which company it is.
3AC had borrowed bitcoin from BlockFi but was unable to meet a margin call after the bitcoin price collapsed this week.
BlockFi’s risk management practices and systems allow us to act decisively to mitigate risk in accordance with our contracts. These actions may include margin calls and asset liquidation when appropriate.
— Zac Prince (@CostSegZac) June 16, 2022
Finblox in trouble
The problems surrounding 3AC appear to have affected Finblox, a Hong Kong-based platform that allows investors to earn returns on their digital assets. Finblox said Thursday it was forced to lower its withdrawal limits because of concerns surrounding the business.
IMPORTANT UPDATE FROM FINBLOX! pic.twitter.com/VjclRMMiSe
— Finblox (@finblox) June 16, 2022
Many investments, much risk
Although estimates vary, 3AC has likely incurred $400 million in liquidations across multiple positions. 3AC is one of the largest investment firms in the crypto industry. It has made investments in blockchain projects like Bitcoin and Ethereum, and has invested in DeFi platforms such as Aave and Balancer. It has even invested in the NFT game, Axie Infinity.
The company also had significant exposure to Terra and also had signficant positions in projects such as Solana and Avalanche. Their position in Terra was worth half a billion dollars at one point, but because these coins are locked in and, therefore, cannot be sold, 3AC could only watch with regret as the value dropped to 670 dollars.
Three Arrows Capital bought 10.9M locked LUNA for $559.6m – it's now worth $670.45.
Ouch
— Crypto Maxi (@cryptoMaxi420) June 14, 2022
With so many partners, it is still unclear which other companies were involved in the liquidation of 3AC. No other companies besides the two loan companies have confirmed involvement.
Company remains afloat
Despite speculation that Three Arrows Capital is at risk of bankruptcy following massive liquidations, the company says it will remain afloat.
One of the company’s founders, Su Zhu, shared a sizeable thread on Twitter this week. There, he said 3AC is “communicating with relevant parties and fully committed to working this out.”
