Three Arrows Capital (3AC) was launched in 2012. It has since grown into one of the largest and most respected hedge funds in the cryptocurrency space. Now the firm is grappling with the biggest crisis in its history. According to the data, it is even possible for the hedge fund to go bankrupt as liquidations increase. Such an impact would be a shock wave that would engulf all altcoin projects. That’s why we researched the altcoins that are most likely to be affected by the liquidations that 3AC has experienced and the possible future bankruptcy.
3AC crisis hits the crypto market
Rumors that Three Arrows Capital may be facing bankruptcy have taken to social media recently. The fund had approximately $3 billion in assets under management in April 2022. However, some recent reports suggested that many of its undercollateralized loans failed to meet margin calls. Amid these allegations, the silence of 3AC founders Su Zhu and Kyle Davies raised questions.
Additional reports suggested that margin calls were not the only reason Zhu and Davies remained silent. As the week progressed, other funds Three Arrows did business with took to Twitter to share their stories. Danny Yuan, CEO of 8 Blocks Capital, was one of them. Yuan’s firm had a longstanding relationship with Three Arrows. However, the CEO said he was unable to contact Zhu or Davies that week. Yuan claimed that about $1 million of his firm’s money in one of Three Arrows’ trading accounts was lost. He then asked the hedge fund for a response.
BlockFi liquidated $400 million
Toward the end of the week, more sources began to confirm the information. Thus, rumors of Three Arrows’ margin completion and liquidation gained credibility. As we reported as Kriptokoin.com, BlockFi liquidated the $ 400 million position held by Three Arrows in the company. As a result, one of crypto’s largest funds has faced a major restructuring. Because of this, fear of further contagion to other parts of the industry has spread throughout the industry. Three Arrows has made a total of 56 investments in various crypto startups, according to Crunchbase data. In most cases, the firm is likely to receive equity in the form of tokens staked over several years.
How will the 3AC crisis affect the Bitcoin and altcoin markets?
Any project that allocates tokens to Three Arrows in exchange for funding will be hit by the crisis. Token allocations are usually earned, meaning buyers have to wait a certain amount of time before selling them. Three Arrows needs to increase liquidity to pay off its current debts. Therefore, as they open, they will turn to token holdings to liquidate them. This will result in the fund selling a large amount of tokens to the already depressed crypto market. Thus, the already high selling pressure will increase even more.
Which altcoin projects are at risk
The list of projects for which Three Arrows holds staking reward tokens is probably huge. However, not all are equally at risk. Smaller projects with lower market capitalization and less liquid markets are inherently more vulnerable to price movements from token unlocking. These projects include Avalanche-based crypto game projects such as Imperium Empires, Ascenders, and Shrapnel. Three projects received support from Three Arrows. They have also allocated vested altcoin assets to early investors in the past.
Other Three Arrows contributors, such as Cardano project Ardana, will continue to unlock tokens. In the coming year, Three Arrows will receive millions of DANA tokens from Ardana’s contribution to investment rounds. Ardana founder Ryan Matovu recently announced that Three Arrows is the startup’s largest single investor. This put the altcoin asset in a dangerous position going forward. As a result, any project Three Arrows supports in the short term is potentially at risk. The details of the firm’s investment deals are often private. However, looking at the vesting schedules of individual projects will sometimes shed light on the timing and extent of upcoming unlocks.
These altcoin projects have already made a loss
DeFiance Capital is another potential victim of the Three Arrows crisis. It operates as a sub-fund and equity class of Three Arrows. He has also followed 3AC’s main fund in many venture investments. Details of the relationship between the two firms are not publicly available. However, recent tweets from DeFiance founder Arthur Cheong indicate that Three Arrows’ liquidity issues are affecting the altcoin project. Accordingly, Cheong sent out a series of cryptic tweets stating that his firm was also experiencing problems. “Some friendships are truly priceless and a blessing. Some are not,” he said.
Details of DeFiance’s condition are still unknown to the public. But given the company’s affiliation with Three Arrows, it’s clear that bankruptcy is a legitimate possibility. If such an outcome occurs, DeFiance will also have to liquidate staked token positions. In this case, projects that receive support from both Three Arrows and DeFiance will be at risk. DeFi protocols Aave and Balancer received funding from Three Arrows and DeFiance in exchange for tokens from their treasury. Aave’s stake tokens are already unlocked. However, it is not yet clear how many of those allocated by Balancer have been unlocked. Other protocols that will be in a similar situation include DeFi projects pSTAKE Finance and MEANfi. Also, crypto gaming projects Civitas, Ascenders, and Shrapnel are among the altcoin projects likely to be affected.
time bomb
It will likely take some time before all of Three Arrows’ liquidity issues become public. Some rumors suggest that the firm has taken out large unsupported loans from multiple lenders. He also states that he used the borrowed capital to use it long term in Bitcoin and Ethereum as the market plummeted. If true, a few big players would lose out on lending to the firm. The fund says it is considering a recovery plan. But more liquidations are on the horizon if he can’t come to a settlement with his creditors or other venture firms. With the macroeconomic picture showing no clear signs of improvement, the Three Arrows crisis has become a ticking time bomb for the crypto industry.
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