Projects that Could be Affected by 3ACs Liquidity Crisis

After being accused of missing payments on a multi-million-dollar loan to the cryptocurrency bank Voyager, the crypto hedge firm, Three Arrows Capital has been facing a huge liquidity crisis.

It was found later that several troubled cryptocurrency projects, including Terra (who doesn’t know the Terra-UST crash?), Axie Infinity, a “play to earn” game that lost nearly $700m (£577) to a North Korean hack last year, and BlockFi, a centralized cryptocurrency exchange that fired hundreds of employees in mid-June, had exposure to Three Arrows Capital (3AC). Additionally, 3AC has sizable leveraged investments in cryptocurrencies like Bitcoin, Ethereum, and others, all of which saw declines of up to 60% in the first half of 2022.

How did it all Begin?

In an interview with The Wall Street Journal, 3AC founders Su Zhu and Kyle Davies said that 3AC had invested over $200 million in the now-defunct LUNA. LUNA’s crash had the 3AC platform awaiting its death toll sooner or later. Davies revealed that the firm was considering selling off its illiquid assets and was ready to accept a buyout from another firm to pay off its debts. This interview fuelled the liquidation reports.

Social media was inundated with reports in the second week of July that the cryptocurrency hedge fund Three Arrows Capital would be filing for bankruptcy. Unconfirmed reports indicate that the fund, which in April 2022 had about $3 billion in property under management, had fallen short of meeting margin calls on several of its undercollateralized loans. When the cryptocurrency market crashed to its lowest levels in 18 months, Three Arrows utilized the money from 8 Block to respond to one of its leveraged long-margin calls.

8 Block’s CEO Danny Yuan commented on the same, “Losing a bet is one thing, but at least be honorable and not drag others into your bets who have nothing to do with it. Certainly don’t ghost on every one since potentially, they could’ve helped you.”

Prior to this, BlockFi had indirectly revealed that the firm had liquidated a $400 million position that belonged to a ‘large client’ (3AC). Later on, more liquidation rumors from Genesis Trading, FTX, BitMEX, and Deribit emerged.

Fears of further contagion to other aspects of the market have spread like wildfire as one of crypto’s largest funds confronts significant restructuring. A total of 56 investments in various cryptocurrency firms have exposure to Three Arrows Capital. In many cases, the agency likely obtained equity in the form of vested tokens that might be locked up for several years. People are now closely following the Three Arrows story to determine who might be impacted if the fund cannot survive without assistance in the midst of the ongoing liquidity crisis.

Who May be Affected?

Any crypto project that has given Three Arrows tokens in exchange for investment will get disastrously impacted by the liquidation crisis the firm might face soon. Token allocations are typically vested, i.e., recipients must wait until after a predetermined period before they can sell them in the open market. Three Arrows could use its token holdings as they unlock if it needs to gather liquidity to pay off current debts. This might lead to the fund dumping a large number of tokens on the already-suffering cryptocurrency market, further increasing the selling pressure.

Even if there are a lot of crypto projects whose vested tokens Three Arrows has, not all of them are equally vulnerable. Smaller crypto projects with lower market capitalization and less liquid marketplaces are inherently more vulnerable to the costs of token unlocking. These smaller, riskier projects include Avalanche-based cryptocurrency game firms like Imperium Empires, Ascenders, and Shrapnel. The three projects have received support from Three Arrows and have already given early investors vested tokens.

Another probable victim of the Three Arrows catastrophe is DeFiance Capital. DeFiance has used its parent fund in many business ventures, acting as a sub-fund and share class of Three Arrows. Although the relationship between the two businesses is private, recent tweets from DeFiance founder Arthur Cheong suggest that Three Arrows’ liquidity issues are impacting more than just the fund.

Although the general public is unaware of the primary details of DeFiance’s financial situation, bankruptcy would seem to be a legitimate danger given the agency’s connection to Three Arrows. DeFiance would likewise have been forced to liquidate its vested token positions if such a result had occurred.

Any crypto project that has been funded in the recent era is undoubtedly in jeopardy, regardless of whether Three Arrows liquidates their vested tokens when they unlock or sell them right away to a different party. While the specifics of the funding offers may occasionally be kept confidential, looking into the vesting timelines of individual projects can frequently shed light on the timing and scope of impending unlocking.

The Bottom Line

It will probably be some time before the full list of the victims of the Three Arrows’ catastrophe becomes known. According to some claims, the organization obtained sizable, unbacked loans from several lenders and utilized the borrowed funds to buy more Bitcoin and Ethereum as the market fell. If true, further spread of the problem is likely because several major players may have lost money by financing the organization.

The fund claims to be considering a rescue plan, but additional liquidations may be in the works if it cannot reach a deal with its creditors or other business entities. The macroeconomic picture showing slight improvement in months has made the Three Arrows tragedy a ticking time bomb for the cryptocurrency market.