Three Arrows Capital (3AC), a Singapore-based crypto investment fund, announced on June 17 that it has engaged several legal and financial advisers. Their mission will be to help the fund find a solution to repay its creditors and investors. The company has been experiencing difficulties for several days related to the collapse of the cryptocurrency market.
From highs to lows in a matter of weeks
Founded in 2012 by Su Zhu and Kyle Davies, Three Arrows Capital is a speculative investment fund that uses “leverage to achieve a high rate of profit”. This technique consists of using the debts contracted with different donors to maximize the return on assets. The higher the debt, the greater the return on investment. The funds of 3AC and its clients were deposited in several centralized and decentralized platforms in order to make them grow using this method. In April, at its peak, it managed nearly $3 billion in assets.
Tether claims to have enough liquidity to support its stablecoin
However, this practice can be extremely risky. The bigger the bet, the more painful the loss. In mid-May, the collapse of the algorithmic stablecoin TerraUSD, supposed to bring stability to a volatile market, and Luna, the cryptocurrency it was backed by, violently shook the Singaporean investment fund. Kyle Davies, one of the two founders of Three Arrows Capital, said in an interview with The Wall Street Journal that ” The collapse of Terra-Luna caught us off guard “.
If he adds that the company was able to mitigate the losses of Luna, he does not forget to specify that the dizzying fall of all digital assets, such as bitcoin or ether, has created new problems. Credit conditions have tightened and some lenders are demanding partial or full repayment of loans. In order to respond to this, 3AC has surrounded itself with several advisers in order to get out of this bad patch. Among the solutions considered is the sale of assets or the acquisition by another company. Three Arrows Capital hopes to reach an agreement with its creditors in order to obtain more time to think about it. In the meantime, she continues to offer her services.
After Celsius, it’s up to Three Arrows Capital to be in trouble
The cryptocurrency market is an unforgiving environment, partly due to its high volatility. On June 12, Celsius, the platform for buying and reselling cryptocurrencies, froze its withdrawal and transaction activities on its site. This had the effect of accentuating the already well underway decline of cryptocurrencies and heightening investor fears. Concerned about the future of their investments, their eyes turned to 3AC.
To manage to tame the instability of the sector, it takes a share of luck. A criterion that was lacking at Three Arrows Capital whose misfortune could be considered a textbook case. The hedge fund was a lead investor in Luna Foundation Guard (LFG) in which it reportedly invested nearly $200 million. The LFG is a non-profit organization whose main mission was to maintain a reserve of digital assets, mainly bitcoins, with the objective of maintaining the value of the $1 stablecoin TerraUSD.
This investment took off during the brutal fall of TerraUSD and Luna. In a vain attempt to raise the price of its digital assets, the LFG resold $3 billion worth of bitcoins. This decision, which has done enormous harm to 3AC, is accentuated by the drastic drop in the price of all crypto assets.
Since then, Three Arrows Capital has struggled with its investors and creditors to meet its commitments. Some players have already jumped ship after declaring the liquidation of the company’s trading positions. Among them, Bitfinex, FTM, Deribit, BitMex or even BlockFi, of which Zac Prince, its president and CEO, presented 3AC as ” a large client who defaulted on an oversized margin loan “.
BlockFi can confirm that we exercised our best business judgment recently with a large client that failed to meet its obligations on an overcollateralized margin loan. We fully accelerated the loan and fully liquidated or hedged all the associated collateral.
—Zac Prince (@BlockFiZac) June 16, 2022
For the founders of Three Arrows Capital, it’s time to reassure investors. ” We are the largest investors in the fund, and our intention has always been that everyone benefits from it explains Su Zhu. Kyle Davies, him, Explain that “ we have always believed in cryptocurrencies and we still believe in them. We are committed to resolving issues and finding a fair solution for all of our customers “.