Headline: What is 3-Arrows Capital and what happened to it?


Body:    Three arrows sounds like a very complicated intersection you might drive through.   But in this case, Three Arrows was a Singapore-based hedge fund that invested in cryptocurrency.  Their’s is an interesting story…

OK, what’s the bottom line anyway?

They went bankrupt, leaving $3.5 Billion in debts behind them.    Now that the Courts are involved, $35.6 Million have been seized from various  accounts associated with Three Arrows.  Earlier in the summer, the top 2 executives involved were actively helping the Court find assets, but, ever since they have remained largely silent.

Thanks for not burying the Lead.   So, now I’m curious.   What happened?

March 2022à 3 AC is now managing more than $10 Billion.

May 11-12, 2022 Lenders inquire about exposure to Luna and Terra, and 3AC reported no problems.

May 18th 2022 Co-founder tries to minimize margin calls

June 3rd 2022 Interest rates increased due to “market.

June 7th 2022 3AC pitches investors a series of methods to  re-capitalize the firm.

June 10th 2022 3AC receives first margin call

June 13th 2022 Founder tries to get a new loan from Genesis.

Mid-June 2022à 3AC engages the services of a Security firm with the  intent to make communications more secure and able to entirely delete.

Late June 2022à Filed for Bankruptcy in British Virgin Islands.

July 1, 2022à Three Arrows Capital, (3AC) filed for  bankruptcy in the U.S.

July 6, 2022à Zoom call with liquidators.   The 2 executives were listening, but mic and video were turned off.

Sometime between July and Decemberà Liquidators were permitted to enter the facilities and look for evidence of assets.   It appears that the offices had been “ransacked” and the vast majority of useful information was missing.

December 2, 2022à Liquidators for bankrupt crypto hedge fund Three Arrows Capital(3AC) said on Friday that the company’s founders are refusing to cooperate with asset recovery efforts, hindering the company’s ability to return funds to creditors.  The amount due to creditors totals about $3 Billion.

Well, that’s pretty  bad.   Anything else?

Well, as a matter of fact… One of the executives did purchase a $50 Million boat called Much Wow with company funds.   But later in the financing plan, funds from the firm dried up and the boat went back on the market.  As a result of the sharp decrease in valuation for Bitcoin and Ethereum, there were significant losses for firms that lent money to 3AC.   Blockchain.com claims a loss of $270 Million due to these loans.  Voyager Digital filed for bankruptcy protection after it couldn’t recover $670 Million lent to 3AC.  Genesis (in severe trouble) and Block Fi (bankrupt) also had significant losses on their loans to 3AC.  Court filings indicate that there is no cash left to pay off creditors.  In turn, it would appear that a substantial chunk of the losses that 3AC suffered were attributable to investment in a stablecoin called Terra.  (There is some fingerpointing here, as investors in the stablecoin were promised 20% return, which many others pointed out was not feasible in the long term.)  Many investors sold Terra( and Luna, related) and in the chaotic process, lost $60 Billion.

In response to this loss, the co-founders both received death threats, forcing them to disappear off the grid and stay in hiding.

Has this ever happened before, outside of the cryptocurrency area?

Yes, it has happened before, or something very much like it.   Several decades ago, there was a firm called Long-Term Capital Management.   This firm had a roster of the “Who’s Who” in economics, computer modeling and trading.  In essence, they used computer modeling to find out what securities were mis-priced.  Then, they would purchase the securities that were “too cheap” and wait for them to come back up to where they “should be.”   Selling them would then provide the profits they were looking for.  (Conversely, they could find securities that were “too expensive” sell them short, and then short cover when the securities fell to their correct value.   They could then pocket the difference in price.)   For a while, this system worked wonderfully.  But, over several decades, the market changed, their models didn’t correct for this, and they made a few disastrous trades.  The firm collapsed in 1998.

One reason for the downfall of LTCM was its use of leverage (read as “debt”).   They would know the trade they wanted to make, but, they wanted to make a trade based upon a larger  amount of securities than they currently had money for.  So, to make a bigger profit (hopefully) they borrowed money, lots of money.   Well, when the markets turned against them, this borrowed money amplified their losses as well… and they went into bankruptcy.  3AC seems to have followed a very similar path, but the extent is difficult to gauge as they were very secretive in their dealings.

The Verdict

Jonathan Zeppettini, international operations lead at decentralized autonomous currency platform Decred, believes market conditions played a bare minimum in the 3AC saga and only helped in preventing the fraud further. He told Cointelegraph:

In reality, they were just participating in other scams such as Terra and acting as a middleman between questionable investments and lenders who thought their record was so impeccable it absolved them from having to do any due diligence. Cascading liquidations caused by the market correcting forced the end of the game. However, in reality, their model was always a ticking time bomb and would have imploded eventually no matter what.

This is interesting because it is quite akin to what happened with LTCM.   They were so crammed with talent, and their track record was so good for a long time, that many of the backers failed to continue asking if their assumptions about the market still held true.   In a similar manner, people saw 3AC as the “adults in the room” and off-loaded their responsibility to do their own research, in favor of trusting 3AC.   For a while, it worked beautifully… until it didn’t.  (Are we sensing a theme here?)  This is likely a cautionary tale.

One more cautionary tale here, I think.    Many of these players who get into trouble in the cryptocurrency area seem to be there largely because of their ownership of a cryptocurrency exchange AND a hedge fund that invests in cryptocurrency projects.  FTX had Alameda Research, and allowed them to use credit more liberally than other firms, and allowed them faster execution times than any other firm.    Now, FTX is QRT, and bankrupt, and people have been arrested.  I found a Reuter’s article that the owner of another major exchange has started a hedge fund of his own, and it makes me quite curious to  see if he follows in a similar path.  I certainly hope not.







Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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