One of the largest crypto venture capital firms, Three Arrows Capital, is on the brink of insolvency as it struggles with asset sales and bailouts. The recent state of 3AC is linked to everything that has happened in the crypto space since the collapse of the Terra ecosystem.

As mentioned, Three Arrows Capital was once one of the largest venture capital funds, managing over $18 billion in total assets under management. Some of their major investments include Ethereum (ETH), Near Protocol (NEAR), and Avalanche.

What led to 3ACs insolvency risks?

Earlier this month, after the Celsius Networks episode, doubts arose about 3AC’s leveraged positions. Here’s a look at what’s going on.

Crypto VC firm Three Arrows Capital (3AC) revealed that they had deposited $245 million worth of Ethereum (ETH) into the AaveAave protocol. The company used these deposits to borrow $189 million in USDC and USDT, bringing their Loan-to-Value ratio to 77%. Due to the illiquidity of these tokens, as they were locked, 3AC was unable to add collateral or pay off debt. This resulted in a major liquidation cascade. As the market started to collapse, this overuse of leverage left 3AC exposed. Things went from bad to worse when reports showed that 3AC was being used everywhere for a long time. This resulted in a large spike in margin calls. The bad thing was that 3AC decided to ghost them instead of tackling them. As the liquidity problems continued to worsen, 3AC sold more than 60K staked ETH (stETH). Zhu Su, founder of Three Arrows Capital, said they are fully committed to working it out and are currently in talks with relevant parties.

3ACs Insolvency and LUNA Collapse

Popular crypto analyst Miles Deutscher explains that the onset of 3AC’s insolvency can be directly linked to the collapse of LUNA and UST. He adds that Three Arrows Capital has bought money from investors and poured it into the anchor protocol. The company has reportedly been using counter-arty funds to build a massive UST position in Anchor Protocol without actually informing the investors.

The VC firm has reportedly purchased $560 million worth of locked LUNA. The value of the same collapsed to a paltry $600 after the collapse of LUNA. These massive losses led 3AC to further increase its appetite for leverage.

The insolvency risks for Three Arrows Capital could be a disaster for the entire crypto group. 3AC has bought loans from almost every major lender like Celsius, FTX, BlockFi, BitMEX and Nexo. In the event that 3AC defaults on its loans, these lenders could take a major hit, creating a knock-on effect. Popular analyst Miles Deutscher explains:

Unfortunately, the sheer size of 3AC’s loans poses more problems than your typical borrower. If you take a $100k loan from a lender, you are f*cked. If you take a $100 million loan from a lender, the lender is f*cked. Unfortunately, a mix of poor risk management, greed and recklessness has led to insolvency with dire consequences for the entire space.

Bhushan is a FinTech enthusiast and has a good flair in understanding financial markets. His interest in economics and finance draws his attention to the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In his spare time, he reads thriller-fiction novels and sometimes explores his culinary skills.

The content presented may contain the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or publication is not responsible for your personal financial loss.

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