The Collapse of Three Arrows Capital: From $10 Billion to Zero

• UST can be considered the main cause of the collapse of the Three Arrows Capital.
• 3AC dragged the voyager down, along with itself.

What is Three Arrows Capital?

Three Arrows Capital or 3AC is a cryptocurrency hedge fund based out of Singapore, founded by Su Zhu and Kle Davies in 2012. 

As of March 2022, the company managed crypto funds worth $10 Billion. However, there is speculation that a significant fraction of their visible assets came from uncollateralized borrowing from multiple lenders. The first half of 2022 was no less than a nightmare for cryptocurrencies. Most of the tokens lost more than 50% of their market value. Luna, in which the company heavily invested, collapsed to near zero in May 2022.

The Court of British Virgin Islands ordered the company’s liquidation on June 27, 2022. Three Arrows Capital had borrowed billions of dollars for trading, amounting to $3.5 Billion at the time of filing for bankruptcy in July 2022.

It was discovered that the company lost around $3 Billion during 2021 and 2022, making it one of the biggest collapses in the crypto and hedge-fund industry.

The Fall of Three Arrows Capital

The fall of Three Arrows Capital can easily be linked to the crash of TerraUSD, a stablecoin of the Terra network with its value pegged to the US Dollar.

Despite its commitment to keep its value stable even at times of volatility, the stability of the UST depended more on a set of codes with less reserve of hard cash to back the arrangement. Investors were incentivized with a 20% of annual yield on their UST holdings on their partner lending platform Anchor. Many analysts believe that this rate is unsustainable. 

Panic selling along with the fall of terraUSD and its sister token Luna, caused the investors to lose $60 Billion. Three Arrows Capital had invested $200 Million in Luna. Various industry reports projected 3AC’s exposure at $560 Million. The failure of the stablecoin project rendered the investment totally worthless. 

The author of “Layered Money”, Nik Bhatia, counted this meltdown of funds as the first domino to fall in the “Long nightmare of leverage and fraud”.

The lenders of Three Arrows Capital requested their money back but their attempt failed as there was no money left. This caused the counterparties not to be able to fulfill the demands of their investors, including the retail investors who were promised a return of 20%.  

After Three Arrows Capital filed for bankruptcy, it dragged crypto broker, Voyager, down with it. Sam Bankman–Fried, the founder of the crypto exchange FTX, claims that the collapse of Three Arrows Capital triggered the ripple effect, leading to asset freezes and bankruptcy filings by other companies.

It is believed that the founders of the Three Arrows Capital are hiding from their lenders. According to Coindesk, the liquidator of Three Arrows Capital is trying to claim around $1.2 Billion from the Digital Currency Group (DCG) and BlockFi to recover the payments by the hedge fund as the liquidation process was about to begin before filing.

Conclusion

The collapse of Three Arrows Capital, a cryptocurrency hedge fund with $10 billion under management, can be attributed to the crash of TerraUSD (UST) and Luna. Unsustainable incentives and significant losses led to its downfall, impacting investors and dragging down the crypto broker Voyager. Now, the company faces bankruptcy and legal battles, while its founders remain in hiding.