- Three Arrows Capital is facing a liquidity crisis due to the collapse of the crypto market. It is believed that the firm may face bankruptcy as it struggles to pay its debts.
- It is likely that the firm will be forced to sell implied tokens derived from the backing of crypto projects in order to meet obligations with its creditors.
- DeFiance Capital could also face the transition from Three Arrows bankruptcy, compounding pressure on projects the two firms have invested in.
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As bankruptcy reports abound, crypto briefing It looks at which firms may be affected by the events of Three Arrows Capital’s recent liquidation and potential bankruptcy.
Three Arrow Crisis So Far
“It’s only when the tide goes out that you learn who’s swimming naked.”-Warren Buffett
Early last week, rumors that crypto hedge fund Three Arrows Capital could face bankruptcy flooded social media. Unconfirmed reports suggested that the fund, which had nearly $3 billion in assets under management as of April 2022, failed to meet margin calls on many of its undercollateralized loans. Several parties described radio silence from Three Arrows co-founders Su Zhu and Kyle Davis when they were informed that their leveraged positions were in danger of being liquidated.
Additional reports suggested that while Zhu and Davis remained silent, it was not simply a margin call. As the week progressed, other Three Arrows funds took to Twitter to share their stories. 8 Block Capital CEO Danny Yuan Told that his firm, which had a long-standing relationship with Three Arrows, was unable to contact Zhu or Davis that week. Yuan claimed that nearly $1 million of his firm’s money had disappeared from one of Three Arrows’ trading accounts, and wanted answers.
According to Yuan, Three Arrows used 8 blocks of funds to answer one of their leveraged long margin calls as the crypto market fell to its lowest level in 18 months. “It’s one thing to lose a bet, but at least be respectful and don’t drag others into your bets that have nothing to do with it. Definitely don’t ghost everyone because potentially they can help you.” were,” he wrote on June 16.
At the end of the week, Three Arrows’ margin call and liquidation rumors gained credibility as more sources began confirming the information. according to a financial Times report goodBlockFi liquidated a $400 million position in Three Arrows held by the firm.
Although BlockFi did not explicitly confirm that it had acted on the Three Arrows situation, the company’s CEO, Zack Prince. wrote On Twitter that a “large customer” who could not meet margin calls on his loans was terminated. “No client funds are affected. We believe we were one of the first to act with this counterparty,” Prince wrote.
In the hours that followed, more liquidation rumors surfaced. Genesis Trading confirmed it had terminated “a major counterparty”, while unnamed sources reported section The firm failed to meet margin calls on FTX, BitMEX and Deribit.
The liquidation report came to light on Friday after Zhu and Davis aired their hedge fund woes in an interview. Wall Street Journal. Davis revealed that Three Arrows had invested $200 million in LUNA before Terra collapsed, leaving the fund in a precarious position. They also confirmed that Three Arrows was considering selling its illiquid assets and was accepting a potential purchase from another firm to help it reach settlements with its creditors.
Although the exact figure is not publicly known, it is believed that Three Arrows had $18 billion in assets under management. As the firm grew, Zhu and Davis became some of the most recognizable figures in the industry, known for a series of successful high conviction stakes.
As one of the largest crypto funds faces significant restructuring, fears of further infections have spread like wildfire in other parts of the industry. As per data from Crunchbase, Three Arrows has made a total of 56 investments in various crypto startups. In many cases, it is likely that the firm received equity in the form of vested tokens that could be locked in for several years. Now, viewers are closely watching the saga of Three Arrows to find out who might be affected if Fund is unable to survive without intervention.
Who can be affected?
Any project that allocates tokens to Three Arrows in exchange for funding could potentially be affected by the firm’s liquidation crisis. Token allocations are usually vested, meaning that recipients must wait for a certain period of time before selling them.
If Three Arrows needs to increase liquidity to pay off existing debt, it may turn to its token holdings to liquidate them when unlocked. This will result in the fund dumping a large amount of tokens in an already depressed crypto market, potentially creating more selling pressure.
While the list of tokenized projects contained within Three Arrows is likely to be vast, not all are equally at risk. Smaller projects with lower market capitalization and less liquid markets are intrinsically more vulnerable to price movements than tokenized unlocks. Some examples of small, low-risk projects include Avalanche-based crypto gaming startups such as Imperium Empire, Ascenders and Shrapnel. Three projects have received support from Three Arrows and have previously allocated vested tokens to investors.
Other startups Three Arrows has contributed, such as the Cardano project Ardana, are set to continue unlocking their tokens. For the next 13 months, Three Arrows will receive millions of Dana tokens that are vested in Ardana’s seed and its contribution to the strategic investment round. Ardana founder Ryan Matovu recently revealed that Three Arrows was the startup’s largest single investor, which further put the DANA token in a precarious position.
Three Arrows may optionally choose to settle its vested tokens in over-the-counter discount deals. Doing so does not necessarily lead to a massive open market token selling at the end of the vesting, which is the other most likely scenario. If firms that buy Three Arrows’ allocations believe in the long-term prospects of those projects, they are more likely to hold onto them — especially when they are acquiring them at a discount.
Even if Three Arrows unlocks its vested tokens or sells them directly to another party, any project backed by the fund is potentially at risk in the short term. While the details of a firm’s investment deals are often private, looking at the implied schedule of individual projects can sometimes shed light on the timing and size of upcoming unlocks.
three arrows fingering
DeFiance Capital is another potential victim of the Three Arrows crisis. Serving as a sub-fund and share class of Three Arrows, DeFiance has followed its parent fund in a number of venture investments. Although details of the relationship between the two firms are not public, a recent tweet by DeFiance founder Arthur Cheong suggests that Three Arrows’ liquidity issues are affecting more than just the fund itself.
After rumors of Three Arrows bankruptcy spread last week, Cheong posted a series of cryptic tweets indicating that his firm was also facing problems. “Some friendships are truly priceless and a blessing. nothing,” he tweeted on June 16.
Cheong’s comments were interpreted by many viewers in the crypto space as evidence that the Defiants were facing bankruptcy as a result of the Three Arrows issue. In response, Cheong Told That his firm was “not done” and was working to find a solution without giving a clear explanation of what was actually happening. Chong has since Told That he is “very proud of the Defiance team” and that “one’s true character has been shown in times of adversity,” indicating that there may still be hope for the firm’s recovery. crypto briefing Three Arrows reached out to Cheong last week to request comment on the crisis but did not receive a response.
While the details of Defiance’s status are still unknown to the public, given the firm’s relationship with Three Arrows, insolvency appears to be a legitimate possibility. If such an outcome were to occur, DeFiance could also be forced to liquidate its vested token positions. In this case, any project that has received support from both Three Arrows and Defiance would be at greater risk.
DeFi protocols Aave and Balancer both received funding from Three Arrows and DeFiance in exchange for tokens from their treasuries. While Ave’s vested tokens have already been unlocked, it is not clear what portion of the tokens allocated by the balancer are still vested. Other protocols that could be in a similar situation include DeFi projects pSTAKE Finance and MEANfi, and crypto gaming projects Civitas, Ascenders and Shrapnel.
A ticking Time Bomb
It will likely be some time before the full extent of Three Arrows’ liquidity issues become public. Some rumors have suggested that the firm took out large non-backed loans from multiple lenders and used the borrowed capital to make long runs on bitcoin and ethereum as the market plunged. If true, there could be a possibility of further transition as many big players will be out of pocket by lending to the firm. The fund says it is considering a rescue plan, but if it can’t make a deal with its creditors or other venture firms, there could be more liquidations on the horizon. With the macroeconomic picture showing no clear signs of improvement, the Three Arrows crisis has become a ticking time bomb for the crypto industry.
Disclosure: At the time of writing this feature, the author held ETH and several other cryptocurrencies.