Liquidated by FTX and other lenders, Three Arrows Capital is in dire straits and may sell assets to seek a way out

The crypto hedge fund Three Arrows Capital (3AC), which is in bankruptcy crisis, is considering selling assets or seeking assistance from external companies. At least three crypto companies, including FTX, Deribit and BitMEX, have liquidated the company's positions. Michael Moro, CEO of crypto lending and trading company Genesis, said on Twitter that the company has liquidated the collateral of a "large counterparty". Although he did not name the company, it is likely that Three Arrows has something to do with it. Kyle Davies, co-founder of 3AC, told the Wall Street Journal on Friday that it has hired legal and financial advisors to develop solutions for its investors and lenders.

In addition to selling assets and seeking external corporate assistance, San Arrows hopes to reach an agreement with creditors to give it more time to develop a plan. The company is still operating and hopes to find the best solution.

Kyle Davies said: "We have always been believers in cryptocurrency and still are, and we are committed to solving the problem and finding a fair solution for all our stakeholders."

At least three companies including FTX have liquidated Three Arrows Capital’s positions

As crypto markets fell across the board, the Federal Reserve's interest rate hikes led to a significant tightening of credit conditions, investors sold high-risk assets, and some lenders demanded partial or full repayment of loans they had previously made to crypto investors.

Crypto exchanges FTX , Deribit , and BitMEX liquidated Three Arrows Capital’s positions in the past week after 3AC failed to meet margin calls, three people familiar with the matter told The Block .

One person familiar with the matter said 3AC owed BitMEX about $6 million. Another source said the impact on FTX was “minimal” and Deribit, which counts 3AC as one of its investors, also took only a “tiny” hit.

A BitMEX spokesperson confirmed that the exchange had liquidated 3AC’s positions. They declined to comment on the amount owed but said BitMEX’s legal department was in touch with 3AC on next steps.

A spokesperson for Bitfinex, another exchange, said the fund closed its positions at a loss without the need for liquidation. 3AC has withdrawn all funds from the Bitfinex platform and Bitfinex has not suffered any losses.

Michael Moro, CEO of crypto lending and trading firm Genesis, clarified on Twitter that the company had liquidated collateral from a “large counterparty.”

The aftershocks of Terra and the ensuing crypto market turmoil have left 3AC reeling. The hedge fund also failed to meet a margin call on BlockFi, the Financial Times reported Thursday.

Some companies are eager to distance themselves from the issue

Crypto fund DeFiance Capital , Layer 1 project Avalanche , and Ethereum -based trading platform dYdX have publicly stated that they have not been affected by the Three Arrows Capital crisis and their projects are still operating normally.

dYdX developers tweeted: "dYdX will not be affected by the 3AC crisis in any way."

Messari founder Ryan Selkis said 3AC faces more than $1 billion in liabilities, pointing out that funds like DeFiance "may go out of business." DeFiance Capital founder Arthur Cheong tweeted in response that the company "has always operated independently and has not gone out of business" and is "actively working to resolve this issue."

3AC portfolio project Avalanche said its treasury is not held or managed by 3AC: “Due to recent speculation, we would like to clarify that 3AC has never managed, used or had custody of any Avalanche Foundation treasury funds in any way”.

Bitpush terminal data shows that the total market value of cryptocurrencies reached nearly $3 trillion in November last year, but has fallen to $910 billion as of Friday. Last weekend, popular crypto lender Celsius Network suddenly froze customer withdrawals, exchanges, and transfers between accounts, blaming it on extreme market conditions.

“We’re not the first to be hit… this is part of the same wave that’s affecting a lot of other companies,” Davies said.

Where to go?

The nearly decade-old hedge fund was founded by former Wall Street foreign exchange traders Su Zhu and Kyle Davies and had assets under management of approximately $3 billion as of April this year.

At their peak, Su Zhu and Kyle Davies were some of the most vocal crypto market players of the past few years. The co-founders initially focused on trading emerging market currencies before pivoting heavily to cryptocurrencies in recent years — with the fund’s investments multiplying as the value of Bitcoin and other digital assets increased.

Three Arrows participated in the $1 billion token sale of Luna Foundation Guard (LFG) earlier this year, investing approximately $200 million in Terra’s native token Luna. Therefore, the collapse of the Terra ecosystem last month dealt a major blow to 3AC as its investment in the luna token was almost reduced to zero.

The massive sell-off was unprecedented, and Davies said: "The Terra-Luna situation caught us very unprepared," and the Luna Foundation's sale of Bitcoin to help maintain TerraUSD also exacerbated Bitcoin's decline in May.

Davies said Three Arrows could have weathered the loss of Luna, but the subsequent cascading price drops of Bitcoin, Ethereum and other cryptocurrencies made matters worse.

The firm is known to have large positions in the Grayscale Bitcoin Trust (GBTC), Lido’s Ethereum-collateralized token, both of which have also suffered losses recently, with the latter being an Ethereum derivative that has been trading at a discount to Ethereum recently.

Zhu Su has been a high-profile proponent of the “supercycle” theory in the past, and since early 2021, he has predicted that Bitcoin will enter a so-called super growth cycle and prices will continue to rise as cryptocurrencies gain more mainstream adoption. In late May, as the market sell-off was underway, he tweeted: “Sadly, the supercycle price theory is wrong, but cryptocurrencies will still thrive and change the world every day.”

Davies said Three Arrows is still working to quantify its losses and assess its illiquid assets, which include venture capital investments in dozens of private cryptocurrency-related companies and startups.

Nichol Yeo, a partner at law firm Solitaire LLP, which is advising Three Arrows, said all investors in the fund are institutions or wealthy investors and that Three Arrows is updating the Monetary Authority of Singapore on its developments.