One of the biggest crypto venture capital firms, Three Arrows Capital, is on the verge of insolvency as it struggles with asset sales and bailouts. The recent state of 3AC is tied to everything that has happened in the crypto space starting with the collapse of the Terra ecosystem.
As noted, Three Arrows Capital was one of the largest venture capital funds at one time and had over $18 billion in assets under management. Some of their major investments include Ethereum (ETH), Near Protocol (NEAR), and Avalanche.
What led to 3AC’s insolvency risks?
Earlier this month, after the Celsius Networks episode, doubts about 3AC’s leverage positions began to emerge. Here is a glimpse of the turn of events.
- Crypto VC firm Three Arrows Capital (3AC) has revealed that it has deposited $245 million worth of Ethereum (ETH) into the AaveAave protocol. The company used those deposits to borrow $189 million in USDC and USDT, bringing its loan-to-value ratio to 77%.
- Due to the illiquidity of these tokens, as they were locked, 3AC was unable to add collateral or repay debt. This resulted in a major cascade of liquidations. As the market began to tumble, this overuse of leverage left 3AC exposed.
- Things went from bad to worse as reports surfaced that 3AC had long been mined everywhere. This led to a sharp increase in margin calls. The bad thing was that 3AC decided to address the ghosts instead of addressing them.
- As liquidity issues worsened further, 3AC sold over 60,000 staked ETH (stETH). Zhu Su, founder of Three Arrows Capital, said they are fully committed to resolving the issue and are currently in talks with affected parties.
Insolvency of 3ACs and collapse of LUNA
Popular crypto analyst Miles Deutscher Explain that the start of 3AC’s insolvency can be directly linked to the collapse of LUNA and UST. He adds that Three Arrows Capital bought silver from investors and deposited it into the peg protocol. Apparently, the company used counterpart funds to build a huge UST position in the peg protocol without informing investors.
Reportedly, the venture capital firm bought $560 million from locked LUNA. The value of the same plummeted to a paltry $600 after LUNA collapsed. These huge losses led 3AC to further increase its appetite for leverage.
Three Arrows Capital’s insolvency risks could spell disaster for the entire crypto group. 3AC has purchased loans from almost all major lenders such as Celsius, FTX, BlockFi, BitMEX, and Nexo. If 3AC defaults on its loans, these lenders can take a hit, triggering a domino effect. Popular analyst Miles Deutscher explains:
Unfortunately, the sheer size of 3AC’s loans creates more problems than your typical borrower. If you take out a $100,000 loan from a lender, you’re screwed. If you take out a $100 million loan from a lender, the lender is screwed. Unfortunately, a mixture of poor risk management, greed and recklessness has led to insolvency which has serious ramifications for the entire space.
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