Three Arrows Capital’s big failure: ETH’s top holder is caught in a liquidity crisis

Where is the bottom for the first big bear market after institutions made high-profile heavy investments?

The crypto market is in panic, and negative news is gradually being realized.

Luna collapsed, Celsius was insolvent, stETH was depegged...accompanied by a series of bad news, the market continued to hit new lows without any rebound.

Today, a tweet from Zhu Su, founder of Three Arrows Capital, once again set the crypto community on fire. “We are communicating with the relevant parties and are committed to resolving the issue.”

This news triggered various speculations and “revelations” about Three Arrows Capital.

In fact, over the past few days, the content about Three Arrows Capital being insolvent and in a liquidity crisis has been increasing and fermenting on Twitter. The discussion mainly focuses on:

1. They buy BTC by leveraging, and BTC continues to fall, which triggers a margin call.

2. It keeps selling stETH (in exchange for ETH) to repay debts;

3. It previously participated in the investment in Luna (tens of billions of dollars have evaporated).

Although Three Arrows Capital has not yet responded directly to the above statement, the on-chain data (a large amount of ETH was liquidated from the Three Arrows address: https://www.odaily.news/newsflash/289024) and the account profit and loss situation disclosed by the exchange (the Three Arrows account suffered huge losses: https://www.odaily.news/newsflash/288974) all point to one thing - Three Arrows Capital is facing its darkest moment and may pull the trigger for a "market spiral decline."

Prelude to Disaster

Why did Zhu Su post such a cryptic tweet? Let’s start with the comments of Danny, the head of trading at 8BlocksCapital.

After Zhu Su tweeted that “the problem is being resolved”, Twitter user @Danny8BC said that $1 million in his trading account at Three Arrows Capital had been withdrawn, and demanded that Three Arrows Capital return it as soon as possible.

As an investment institution that once managed tens of billions of dollars, transferring funds without the authorization of its partners inevitably aroused speculation. Could it be that the liquidity of Three Arrows Capital, which has always been "rich and powerful", has dried up?

In fact, there were rumors in the market that Three Arrows Capital was suspected of having operational and repayment problems due to the market crash. Since the collapse of LUNA in May, Three Arrows Capital has been operating frequently. It has transferred huge amounts of ETH to FTX and Bitmex, and has transferred out about 162,629 ETH so far.

At the same time, Three Arrows Capital was also selling stETH. When stETH was "decoupled" to 0.94 ETH, Three Arrows Capital withdrew 127,000 stETH of liquidity from Curve (worth $246 million at the time).

Recently, the stETH depegging incident has intensified (for details of the incident, see "Why stETH is not the next UST"). Circular lending and liquidity shortage have caused stETH/ETH to continue to depreciate.

On-chain data shows that in addition to Celsius's crazy sales, Three Arrows Capital is also selling stETH through its sub-accounts and seed round investment addresses.

On June 14, the address marked as Three Arrows Capital by Nansen exchanged 38,900 stETH for 36,718.64 ETH (exchange rate of about 0.94) through Matcha. Afterwards, Three Arrows Capital also exchanged 17,780 stETH for 16,625 ETH, and then all of them were exchanged for nearly 20 million DAI.

Aave data shows that the Three Arrows Capital wallet has borrowed $198 million, with a pledge rate of about 85%. If ETH drops to $1,042, it will be liquidated. To avoid liquidation risks, it has been actively repaying debts borrowed on the chain. (Odaily Planet Daily Note: At around 17:00, ETH fell to $1,028, and Paidun detected that 3,346 ETH was liquidated from a suspected Three Arrows Capital address.)

In addition to stETH, Three Arrows Capital is also the largest holder of Grayscale Bitcoin Trust GBTC (5.62% of GBTC shares at the end of 2020). As the market continued to fall, this part of the position also shrunk severely due to decoupling, and Three Arrows Capital faced Margin Call.

According to crypto trader degentrading, Three Arrows Capital has lending positions on multiple mainstream lending platforms (such as BlockFi, Genesis, Nexo and Celsius). According to The Block, Three Arrows Capital's $400 million position has been liquidated. At 17:14 Beijing time, Three Arrows Capital was liquidated again for 2,681 ETH. If the market continues to fall, further large-scale chain liquidations will be triggered, and the impact will be very wide.

Sanjian’s famous works and “dark history”

What is the existence of Three Arrows Capital in the crypto market?

Three Arrows Capital was founded by Zhu Su and Kyle Davies in 2012 and has been investing in the cryptocurrency field. Its investment portfolio includes top L1s such as BTC, ETH, AVAX, LUNA, SOL, NEAR, and MINA. At its peak, it had assets of more than US$10 billion and is one of the most active investment institutions in the cryptocurrency field.

Moreover, Three Arrows is also the first investor to hold more than 5% of GBTC shares, with a maximum share of 6.26% at the beginning of 2021 (no latest data yet).

The reason why Three Arrows Capital is well-known in the market is because of the high-profile and radical speech style of its founder Zhu Su . Many people first heard of his name during the “Ethereum Debate” in November last year.

At that time, Zhu Su angrily criticized Ethereum, saying that the Ethereum GAS fee was high and was no longer suitable for new players; the developers of the Ethereum community had become rich and forgotten their original intentions, and needed a bear market to cool down, or to build a new blockchain elsewhere that truly supported users. He also made it clear that he had been a supporter of Ethereum, but now decided to abandon the idea of ​​​​Ethereum.

As one of the biggest beneficiaries of the Ethereum ecosystem explosion, Three Arrows Capital’s open boycott of Ethereum was met with counterattacks from Ethereum community members including Vitalik Buterin. Ultimately, Zhu Su gave in and issued an apology, declaring the matter over.

In fact, Zhu Su’s attack on Ethereum is not without purpose. There are two core reasons: first, Three Arrows Capital bet on Ethereum and exchanged SOL for ETH before the outbreak of Solana ecology, and the returns of the two were very different; second, at that time, Three Arrows Capital invested heavily in public chain ecological projects such as Avalanche and Solana, and Zhu Su’s related tweets also supported Avalanche in various ways, attracting Ethereum community builders and users to migrate to the new ecology, which is more in line with its own interests.

However, just half a month after the debate ended, Three Arrows once again "turned against" the other side. In early December, the wallet address marked as Three Arrows Capital transferred more than 100,000 ETH (about $400 million) from multiple trading platform addresses for several days. In response to this, Zhu Su responded on Twitter that the 100,000 ETH purchased was "insignificant" and that more ETH would be purchased in the future; and he said that he would not abandon Ethereum and would continue to buy it when the market panicked in the future. Zhu Su's behavior of disliking Ethereum and then increasing his position was ridiculed on social media.

In the following months, Three Arrows Capital did fulfill its promise and continued to increase its ETH holdings, as if it had "unlimited bullets", gradually becoming one of the largest coin holders on Ethereum. At that time, the market was still very curious about where the money for Three Arrows' increased holdings came from. Now it seems that it was probably a circular mortgage loan that gave itself leverage, which also laid the groundwork for today's defeat.

The core reason for the collapse of Three Arrows Capital was that Zhu Su misjudged the market and was overly optimistic about the trend of crypto finance and Bitcoin, which led to wrong decisions and continued increase in leverage. When the market went down, he could only keep adding to his positions, but he still could not resist the downward trend and was liquidated.

In an interview with the UpOnly podcast last year, Zhu Su said that if the market value of Bitcoin reaches the level of gold, the price of Bitcoin could be as high as $2.5 million per coin. At the beginning of this year, Zhu Su tweeted, "I will only make one prediction for 2022, that is, at least 10 nation-states will make BTC a legal tender." In addition, Zhu Su also proposed the concept of "super cycle", in which he believes that the crypto market will gradually rise in this market cycle to avoid a continuous bear market.

However, this year, as central banks around the world raised interest rates and curbed inflation, global financial markets continued to decline in the past few months, and crypto finance was also unable to remain immune. Bitcoin continued to fall, hitting a 19-month low, and Zhu Su's "super cycle" became a joke. In a tweet at the end of May, Zhu Su wrote: "Regrettably, the super cycle price theory is wrong, but cryptocurrencies will still thrive and change the world every day."

Since June this year, Zhu Su, who has always been high-profile, has become "silent" and has begun to reduce his comments on currencies other than Bitcoin; even when it comes to Bitcoin, he only lists favorable data to recharge the market's faith. On Twitter, he wrote, "My team told me that the next 20,000 tweets should only be about Bitcoin." In addition, he also deleted the words ETH, AVAX, LUNA, SOL, NEAR, MINA, etc. from his Twitter profile.

Of course, in addition to the wrong decision, Three Arrows also seemed to lack some "luck" and caught up with the biggest crash in the history of cryptocurrencies - the Terra & UST crash. In February of this year, Terraform Labs established LFG to support UST hooking and successfully raised $1 billion, led by Jump Capital and Three Arrows Capital; with the UST crash and Terra's plunge, LFG's loss rate exceeded 90%, and Three Arrows also suffered heavy losses.

This sudden collapse has undoubtedly greatly weakened Three Arrows Capital’s ability to resist risks, leaving it completely exposed to the risk of the overall market decline.

The possibility of a death spiral

Coincidentally, when the crypto market was booming, the high-profile heavy positions and loud bullish voices of institutions were undoubtedly the "reassurance" for all investors, but in today's falling market, the former bull market promoters have become black swans lining up, each holding a number plate to be liquidated. What's more terrifying is that in the transparent financial system on the chain, the numbers on these number plates are clearly visible to everyone.

In the face of various market speculations, Three Arrows Capital has not yet given an official response. Amid the panic of liquidation and debt, will Three Arrows Capital face a death spiral? Will the market fall further? In the absence of accurate data and information support, some KOLs have also made some judgments.

degentrading believes that Three Arrows Capital is one of the largest borrowers/clients of global lenders. Celsius, BlockFi, Genesis, etc. are all related to Three Arrows Capital, and their incident this time will transfer economic risks to their lenders. For example, Three Arrows holds a large number of loan positions through CeFi institutions such as Celsius. Once it encounters a complete liquidation, in addition to bringing greater selling pressure, it may also trigger a more terrible chain reaction, because the loss gap between its loan positions and collateral assets will be forced to be borne by these CeFi institutions, and Celsius and other institutions are now in a difficult situation...

However, crypto KOL Jiang Zhuoer believes that the three arrows will die, but the market has basically bottomed out and market panic will gradually pick up.

Regardless of the outcome of the three arrows, the market is in a panic. As of press time, ETH fell below 1100 USDT and is now at 1024.01 USDT, a 24-hour drop of 16%.

With market sentiment low today, no one can accurately predict the market’s future trends. This is the first major bear market after institutions entered the market in large numbers, but it is not the first time that Bitcoin, Ethereum, or even the crypto market has faced a thorny crisis.

We are convinced that the market will always bottom out and rebound. This decline may not be worth mentioning in the long history of the future, but as ordinary investors, we must not easily judge short-term and heavy positions to buy at the bottom. The crypto market never lacks opportunities, but we always lack bullets in our hands.

Author: Shiwen, Qin Xiaofeng, Azuma; Editor: Hao Fangzhou