Fall Of 3 Arrows Capital (3AC) | Reasons Shared By Founder Zhu Su
In the recent couple of months, Bitcoin has been on the long road of the downside. Bitcoin dropped to $30,000 from its all-time high of around $63k and is now trading at around $24k. If we start to list down the reasons for this situation then along with regulations around the world, LUNA's failure would be on top of that list. Luna's failure has wiped out millions of dollars from the market cap in just a matter of a few days and that is what affected the market so seriously, that it still has not been recovered. And one more serious impact of the Luna crash is that it affected the credit issues of the major centralized lending platforms and other related platforms like Celsius Network, 3 Arrows Capital, Voyager Digital, and many others. This resulted in those platforms running out of liquid assets to cover their loans, affecting their cash flow and most of them stopped the withdrawals until further notice.
In this article, we will look into the reasons why 3 Arrows Capital has failed in this situation considering the founder Zhu Su's opinion. So without any further delay let's get into it!
What Is 3AC?
So before getting into the reasons for failure let's have a look at what actually failed, I mean what three arrows capital is. So basically, 3AC is a hedge fund started in 2012 by two classmates Zhu Su and Carl Davis. As it is one of the earlier hedge funds to get into the crypto space it was one of the most successful ones. And to mention the hugeness of the 3AC, it has assets worth $18 Billion and that is really a huge number! Now you can imagine how the failure of hedge funds like the scale of 3AC has affected the crypto market.
Reasons Of Failure
Now as you might get the idea of how large 3AC was and what could be the reasons for failing this massive hedge fund in the current market scenario. According to the 3AC founder following are the three reasons that made giant like 3AC fail:
Personal closeness with terra founder and investments in Luna
Fall of Bitcoin
Grayscale Bitcoin Trust (GBTC) trades
The founder of 3 Arrows Capital, Zu Su has admitted that the personal closeness with Terra's founder is one of the reasons that 3AC has failed. And not to mention that 3AC was hugely invested in the Luna. While mentioning this as one of the reasons Zhu has said:
"What we failed to realize was tha Luna was capable of falling to effective zero in a matter of days and that this would catalyze a credit squeeze across the industry that would put significant pressure on the our illiquid positions."
We all know that Bitcoin has called more than 50% of its all-time high value in the last couple of months. This fall of Bitcoin has also contributed to the fall of 3AC. 3AC continued to borrow funds from its investors and the problem with those loans was that they required very small collateral. The fall of Bitcoin resulted in a mess for 3AC and we can see here too that 3AC was not very well prepared for this fall of Bitcoin. While mentioning this part, Zhu said:
"Bitcoin went from [USD] 30,000 to [USD] 20,000, you know, that, that was extremely painful for us. And that was in, that ended up being kind of the nail in the coffin."
Grayscale Bitcoin Trust (GBTC)
Grayscale is one of the largest players in the space of digital assets and GBTC is one of their most popular products. They have created the shares backed by some portion of Bitcoin which allows investors to get into the crypto space without actually getting exposure to Bitcoin. This is one of the favorite trading instruments of institutional investors.
At the time of launch Grayscale Bitcoin Trust offered direct purchase of shares for large investors like 3AC by providing Bitcoin to the trust and then allowing them to sell those shares on the secondary market. 3AC thought it would be a great investment and dived into it. According to the company's filing 3AC was the top GBTC holder in 2020, holding around $1 Billion worth of GBTC. The problem with this investment was that the initial holdings of the purchased shares were locked for a period of six months and due to various reasons price of GBTC started to drop compared to the Bitcoin which was used to back GBTC.
And finally, the founder Zhu Su tried to clarify the various allegations made against him on the social media platforms like taking out the money from the 3AC:
"People may call us stupid. They may call us stupid or delusional. And, I'll accept that. Maybe. But they're gonna, you know, say that I absconded funds during the last period, where I actually put more of my personal money back in. That's not true."
Irrespective of how big an entity is if it does not respect the market and do its due diligence before investing then it won't take long to crash on the ground. What we learn from these mistakes of 3AC is that never invest your money based on your emotions or relations, and be ready for worst situations because you never know when the market will react against you. And we can hope we won't see any projects failing like Terra Luna.
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LUNA and 3AC cases made the zombie companies die out in crypto. This bear market eliminated the weak ones with no pity :O