We’re witnessing the biggest leverage reset in crypto history. One of crypto’s largest VCs 3AC is facing insolvency, which could spell disaster for the entire space. 🧵: The ULTIMATE thread on what led to the downfall of 3AC, and what it means for the future of crypto. 👇
2/ Three Arrows Capital (3AC) is a crypto venture capital fund, lead by @zhusu and @KyleLDavies. At their peak they were managing an estimated $18b in assets, ranking them in the top 3 VCs in the space. Some of their most successful investments include: $AVAX, $NEAR and $ETH.
3/ Unfortunately, a mix of poor risk management, greed and recklessness has lead to insolvency which has severe ramifications for the entire space. A step-by-step summary of how it went down and what it means for crypto. 👇
6/ Due to their illiquidity (many tokens were locked), they were unable to add collateral or pay off debt. This lead to a liquidation cascade. Many began to label their overuse of leverage as “irresponsible”, as many positions were left exposed when the market started dropping.
10/ The beginning of 3AC’s woes can be directly tied back to the collapse of $LUNA and $UST. • 3AC supposedly borrowed money off investors and deposited into Anchor (without informing them) • Bought $560m worth of locked $LUNA • That position then collapsed to a mere $600
12/ There’s speculation that these losses led 3AC to increase their appetite for leverage, as a form of “chasing losses.” Like many investors, VCs and asset managers like 3AC and Celsius got overconfident in the heat of the bull market.
13/ We see this a lot in poker, regarded as being “pot stuck.” When “effort or money already spent is causing you to stay around even though it’s a losing proposition.” They kept putting money into the pot to recoup previous losses, resulting in exponentially increasing risk.
14/ As @VinnyLingham pointed out today: In crypto, you’re already taking on significant risk as it is. Why add leverage and further compound said risk? I think in the case of 3AC it’s clear: Greed.
15/ So why does 3AC’s insolvency spell disaster for crypto? Because they borrow from almost every major lender. FTX, Celsius, BlockFi, Nexo and BitMex to name a few. If 3AC is unable to repay loans, all lenders inevitably take a hit. This kicks off somewhat of a domino effect.
16/ Unfortunately, the sheer size of 3AC’s loans spell more trouble than your typical borrower. If you take a $100k loan from a lender, you’re f*cked. If you take a $100m loan from a lender, the lender is f*cked.
19/ When it comes to managing assets, carelessness with your own money is one thing, but carelessness with an investor’s money is another. 3AC had a responsibility to its stakeholders, and continued to act in a reckless manner.
24/ Remember: There’s significantly more VCs, capital, and leverage in crypto now than there was in 2017. This means the drawdowns are continuously becoming more extreme. There’s a lot of leverage left to be unwinded, and big players to be liquidated.
26/ So what’s next for crypto after 3AC’s downfall? Well, it would be naive to suggest the contagion has stopped. 3AC and Celsius are two of the first institutions to reach the brink of collapse, but will certainly not be the last.
27/ Unfortunately, these events are a bad look for the space and certainly hurt credibility. But this great leverage reset is essential to ensure the long-term sustainability of the crypto market, as painful as it is in the short-medium term.