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What is Three Arrows Capital? Investment Firm Confirms Loss from Luna and Terra Collapse

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The cryptocurrency hedge fund Three Arrows Capital (3AC) is looking into selling its assets or getting rescued by another entity after it confirmed suffering unprecedented losses because of the recent decline in the cryptocurrency market prices.

How did 3AC Collapse and how is it connected to the LUNA collapse?

Kyle Davis, co-founder of the 10-yr old crypto hedge fund said, they invested more than $200 million in the cryptocurrency LUNA, the token at the center of the LUNA – Terra (UST) crypto collapse last May.

The investment was part of the funding round to Luna Foundation Guard (LFG) early this year, where the foundation, which is a fund to protect the Terra ecosystem, raised $1 billion.

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When UST depegged away from the US dollar, it caused LUNA, the cryptocurrency it is tied to, to also lose value, leading to a downward spiral that brought the two coins to essentially zero.

This means the $200 million of 3AC in Luna is now worth nothing. Cofounder Davis admitted the implosion of the two tokens caught them off guard.

What does 3AC do? What else does it hold? A primer on GBTC and stETH

One of the most highly regarded players in the space, Three Arrows Capital’s business is essentially to manage other people’s and entities’ money. Its founders are Kyle Davis and Su Zhu, the latter is a very prominent personality in the crypto industry, and has 564,000 followers on Twitter.

It also holds a large amount of GBTC or Grayscale Bitcoin Trust. What is GBTC? It is a financial product that enables investors (mostly institutions that would never touch crypto) to gain exposure to the price movement of the largest cryptocurrency.

Furthermore, it holds staked ether (stETH). For the unfamiliar, remember that Ethereum is transitioning to become a proof-of-stake (PoS) blockchain, which means entities that “stake” their ETH will be the ones validating and securing all the transactions in it. To begin validating, entities need to stake at least 32 ETH. 32 ETH is a large amount, so LIDO Finance launched staked Ether or stETH; people stake their ETH to Lido, then Lido gives them stETH 1:1 from the amount of ETH they deposited. Doing this allows the staker to still have liquidity (using stETH to trade or use if they want to) while benefiting from being part of the first entities to stake their (real) ETH before Ethereum finally transitions to proof of stake.

Because GBTC is tied to the price movement of Bitcoin, it is experiencing a steep price decline as well. Meanwhile, stETH is deppeging away from ETH’s price (instead of being 1:1 to ETH), causing more selling pressure. GBTC and stETH contributed to the losses of Three Arrows Capital as well.

What is 3AC doing now?

Cofounder Davis said they are presently quantifying their losses, including figuring out what to do with their assets that are currently illiquid. 3AC has invested in many crypto startups. Most of the time, the process is that they invest by participating in the startup’s earliest funding rounds. For example, they’ll purchase X amount of the startup’s own crypto token at the lowest possible amount. Depending on the agreement, they might sell these crypto tokens in the open market (where retail investors participate) where the price is already higher than during the earliest funding round. Mostly, these tokens have a schedule of unlocks so that firms like 3AC can’t sell them immediately.

But with the reported losses of 3AC, some on Twitter suggest that it may be (or may have already) looking to immediately dump the tokens that it will receive once the tokens are unlocked:

What are Three Arrow Capital’s Primary Holdings?

According to crypto investor Miles Deutscher, retail investors should keep an eye on the following assets as 3AC may look to immediately dump the tokens after unlock.

(*Unlocks on the relevant projects that are still vesting because obviously some of the projects below do not have unlocks.)

  • Avalance
  • Bitcoin
  • Ethereum
  • Kusama
  • Mina
  • Near
  • Polkadot
  • Solana
  • Terra
  • Aave
  • Ardana
  • Balancer
  • DerivaDEX
  • dHedge
  • Dydx
  • Futureswap
  • GRO
  • KeeperDAO
  • Kyber Network
  • Lido
  • mStable
  • Multichain
  • Neon
  • Orca
  • Perpetual Protocol
  • Synapse
  • Thetanuts Finance
  • Trader Joe
  • Tranchess
  • Woo

Note that the entire scale of the Three Arrows Capital situation is more complicated so readers are advised to explore other articles.

This article is published on BitPInas: What is Three Arrows Capital? Investment Firm Confirms Loss from Luna and Terra Collapse

Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.