Three Arrows Capital, a crypto fund that at one point managed over $10bn in assets, collapsed last week due to bad bets including Terra and Grayscale’s Bitcoin Trust, as well as a toxic macro environment and poor crypto sentiment. Founded in 2012, Three Arrows Capital started trading traditional emerging currencies before focusing almost exclusively on crypto in 2018. Its investment strategy involved trading bitcoin and ethereum derivatives, investing in crypto companies in equity rounds, layer ones, DeFi, gaming and NFTs. The fund initially diversified by trading bitcoin and ethereum derivatives, with a focus on equity round investments later. Its co-founders, Kyle Davis and Su Zhou, were popular figures in the crypto community and regular tweeters about their market moves.
—
Three Arrows Capital Collapse: What It Means for Crypto Investors
Last week, the crypto world was rocked by the collapse of Three Arrows Capital, which at one point had over $10 billion in assets under management (AUM). The fund, run by old classmates and crypto veterans Suzhou and Kyle Davis, was reduced to a debtor almost overnight, with several counterparties knocking at the door.
But how did this happen, and more importantly, could this spread to other crypto funds and companies? What does this mean for the future of crypto? In this article, we’ll explore these questions and more.
Background: How Three Arrows Capital came to be
Three Arrows Capital was founded in 2012, initially focused on trading traditional emerging currencies. Within three years, however, the founders started dabbling in crypto, and by 2018, the fund became almost exclusively crypto-focused. Their investment strategy was initially focused on trading Bitcoin and Ethereum in the derivatives markets, but over the years, they diversified into investing in crypto companies, DeFi, gaming, and NFTs. With their impressive track record and solid portfolio, it’s no wonder their AUM swelled to over $10 billion.
The Collapse: What Went Wrong
The downfall of Three Arrows Capital can be traced back to their involvement in Terra. The fund was a big proponent of Terra and worked closely with the Luna Foundation Guard (LFG) to accumulate more Bitcoin. Specifically, 3AC bought 10.9 million Luna that were locked due to vesting – a position worth over $500 million. However, the collapse of Terra’s UST peg led to a collapse in the value of Luna, and what was once an impressive investment turned into a $670 million loss.
But it wasn’t just their involvement in Terra that led to their downfall. It was also their strategy with the Grayscale Bitcoin Trust (GBTC). 3AC was the largest holder of GBTC shares, which for years traded at a premium. However, the launch of ETF products last year caused that premium to turn into a discount, and the discount continued to widen. 3AC was convinced that an ETF approval would reverse this, and they began aggressively pitching the GBTC arbitrage trade to investors. However, a few days before rumors of insolvency started to surface, their strategy fell apart.
What It Means for Crypto Investors
The collapse of Three Arrows Capital is undoubtedly a blow to the crypto world. Still, it’s also a reminder of the importance of prudent investment strategies. While it’s unclear how many investors were affected, it’s clear that many were likely hurt. As for the future of crypto, this collapse is a reminder of the risks involved in investing in this space. Still, it’s important to remember that not all funds are alike, and many professional investors are making smart investments in crypto.
In conclusion, the collapse of Three Arrows Capital is a significant event in the crypto world. While it’s unclear how far the fallout will spread, it’s important to remember that proper due diligence and a sound investment strategy are critical to success in this space. Only time will tell how the crypto market will react to this collapse, but for now, investors need to remain vigilant and cautious.
