Crypto dominoes fall, 3AC forced to liquidate
Overleveraged, undercollateralized, and a complete meltdown in the crypto "hedge" fund world.
Dear readers,
Leverage is one hell of a drug until the music stops and everybody tries to find a chair.
Three Arrows Capital (3AC), a large and well-respected crypto ‘hedge fund’ often viewed as the adult in the room, was unveiled to be undertaking extremely risky arbitrage trades with excessive leverage using client funds. We took the liberty of putting ‘hedge’ in quotes because in hindsight, not only were they not hedging anything, but they also evaporated billions in creditors’ funds.
Today, we’ll be doing a deep-dive into 3AC’s fund size, the leverage it undertook, and affected counterparty exposure.
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Today’s Topics
How the Terra/Luna scam started it all
Celsius, a “yield” platform in crypto, exposed as a Ponzi scheme (!!!)
3AC meltdown, AUM down 99%
Voyager, another crypto lending platform, wiped out due to 3AC exposure
Some unresolved plot lines remain
Domino deleveraging
This year’s macro liquidity drawdown was bound to hit the most fragile institutions first, and the Terra/Luna blowup in early May was the tipping point that pushed over the first domino in a long, nightmarish chain of leverage and fraud. The de-peg of USD Terra (UST) stablecoin and the subsequent death spiral of its associated token Luna vaporized over $50 billion, triggering a cascading leverage unwind throughout the crypto ecosystem, as institutions scrambled for liquidity to meet loan obligations.
After the collapse, what would happen next? Which counterparties had exposure to Terra/Luna?
Among the players impacted by UST blowing up was Celsius, which was able to recover only $500 million of funds from Anchor (another crypto lending platform) during the crisis, freezing withdrawals as it tried to fix what had already broken. As of yesterday, Celsius is being sued by a former associate for operating a Ponzi scheme. Seriously, an actual Ponzi scheme:
Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors. Thus, while Celsius continued to market itself as a transparent and well-capitalized business, in reality, it had become a Ponzi scheme.
The unwind decimated Celsius, but it would also vaporize billions of dollars worth of assets from Three Arrows Capital, a hedge fund that ironically wasn’t doing a great deal of hedging when it came to creditor’s money.
3AC AUM and leverage breakdown
After reportedly managing $10 billion at its peak, 3AC recently filed for Chapter 15 bankruptcy protection and has been forced to liquidate its remaining assets by a British Virgin Islands court, where its fund is managed. This begs the question: how risky was 3AC playing it? Some of the positions we know about (liquidated, or soon to be during bankruptcy): $560 million exposure to locked Luna, $250 million exposure to ETH (via stETH on a platform called Curve), and hundreds of millions more on other platforms called Aave and Compound. Here’s the latest snapshot of 3AC’s GBTC holdings, although we don’t know if these shares have been liquidated or not as the data could be weeks stale:
Impacted counterparties
We’ve yet to receive the full bankruptcy report which would detail 3AC’s exposure to creditors in decimal-accurate detail. As such, we’ve done some investigative digging in order to paint the clearest picture of how much wealth has been vaporized from 3AC going belly up.