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Report: Unexpected liquidations may force Three Arrows Capital into bankruptcy

By:
on Jun 15, 2022
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  • Dubai-based crypto hedge fund Three Arrows Capital may be on the verge of bankruptcy
  • 3AC's cofounder Zhu Su admits that it is a time of stress but did not share specifics
  • Further fall in crypto prices can be disastrous for 3AC

The present market situation echoes the early days of the 2008 financial crisis, owing to increased liquidations and conservative investor sentiments.

Three Arrows Capital (3AC), a Dubai-based hedge fund manager, may be on the verge of bankruptcy after accruing at least $400 million in liquidations lately, as reported by The Block.

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3AC is a well-known crypto hedge fund that has invested in many GameFi and DeFi ventures. It was founded in 2012 by classmates Zhu Su and Kyle Davies.

Wednesday’s tweet from 3AC’s cofounder Zhu Su, who seemed to admit a time of stress but did not provide specifics, added fire to the bankruptcy rumours.

Amid the existing market conditions, it seems that 3AC is finding it harder than ever to fulfil its financial commitments due to the dramatic decline in cryptocurrency prices.

In conventional finance, liquidations occur when a business attempts to pay off its obligations by selling assets at a loss. A fund or protocol would sell cryptocurrency assets to settle its debt under decentralised finance (DeFi).

Meanwhile, neither 3AC nor its team has issued an official release or statement to substantiate the rumours. However, given the present market dynamics, 3AC seems to be in dire trouble right now.

Analyst shares gruesome concerns

Shedding some light on the entire fiasco, Marcus Sotiriou, Analyst at the UK based digital asset broker GlobalBlock mentioned in a statement:

“This is one of the biggest crypto hedge funds, and one of the biggest borrowers. At its peak, it owned over 5 billion dollars of assets and hundreds of thousands of ETH. If they collapse, this will mean that lenders would incur drastic economic risk. The Profit-Loss difference between how much they owed versus what they get in liquidating their collateral is at risk.”

Commenting on the intensity of the situation, he further added:

“Lenders will be forced to protect themselves by withdrawing credit from the system and result in further de-leveraging of crypto assets. I think it is likely that more people need to de-lever still.”

Meanwhile, WuChain revealed in a tweet that 3AC has a collateral position of 211,999.12 WETH on Aave V2 worth about $235 million and a total debt of $183 million (USDC+USDT). If the price of ETH falls close to $1,014, the collateral position will be liquidated.

If such a scenario unfolds, 3AC’s ability to pay off its obligations will become more improbable, and the business may be forced to sell its remaining financial assets, eventually resulting in insolvency.

Nexo releases statement

Nexo, a DeFi lending platform, has been in the spotlight following Celsius’ unexpected decision to suspend all withdrawals, swaps, and account transfers. In response to Celsius’s statement, Nexo, a rival, released a buyout offer to purchase Celsius’s qualifying assets.

Meanwhile, following the mounting speculations on 3AC, Nexo confirmed through its official Twitter handle that it has no exposure to Three Arrows Capital.

Nexo considers itself an extremely cautious lender with tight risk management and strong over-collateralization standards, regardless of the borrower’s reputation. Nexo even mentioned declining 3AC’s request for unsecured credit two years ago.