Crypto fund Three Arrows Capital (3AC) could die amid liquidation …

Key Takeaways:

Three Arrows Capital (3AC) faces insolvency crisis
The Celsius network, which paused withdrawals recently, is facing a similar situation
If 3AC and Celsius foil, the implications on the larger crypto market will be serious

Three Arrows Capital (3AC) faces liquidation crisis. It failed to raise a $5 million margin call. Meanwhile, Celsius network faces insolvency — Three Arrows Capital (3AC) failed to raise the $5 million it needed against a $1 billion loan. Credit: Ivan Radic

YEREVAN (CoinChapter.com) — Three Arrows Capital (3AC), the popular crypto hedge fund, could face insolvency. The firm allegedly faced liquidation from multiple positions by its members, rendering it unable to meet a recent margin call. Meanwhile, the Celsius network is in a similar situation.

According to reports, 3AC failed to raise the $5 million margin call it needed against a $1 billion loan. The development comes after sources close to the fund reported lenders liquidated up to $400 million from the fund.

Rumors floating that 3AC couldn't meet a $5M margin call on a $1B loan. If true, this is devastating.
— Autism Capital 🧩 (@AutismCapital) June 15, 2022

The news comes as a major shock, considering the hedge fund reportedly had $10 billion in funds under its management.

Crypto lending platform Celsius, which paused withdrawals days earlier, is rapidly increasing its positions to avoid liquidation. As they both now struggle to survive, failure to do so could have serious implications on the larger cryptocurrency market.

Three Arrows Capital (3AC) faces an uncertain future

Three Arrows Capital bore significant losses last month when the Terra ecosystem collapsed. The hedge fund had invested heavily in LUNA, the native token of the Terra network.

3AC’s other altcoin investments, including Ethereum (ETH), Avalanche (AVAX), Polkadot (DOT), etc., are also reeling under heavy losses.

Now that the 3AC rumours appear to be true, the question shifts to how many counterparties they were exposed to? And will these counterparties have to adjust their books given their own exposure?

Hoping for an orderly resolution, but markets sometimes aren't orderly…
— Coin Bureau (@coinbureau) June 15, 2022

To provide liquidity, Three Arrows Capital also sold at least $40 million worth of Lido’s staked Ether (stETH) early Tuesday at an apparent loss.

Each stETH represents a staked value of ETH, which holders can use to redeem ETH tokens after the Ethereum network completes its transition to the proof-of-stake (PoS) mechanism.

While it lost its value in May, the “de-peg” last week has sent out worrying signals. Of course, staked Ether is not a stablecoin per se, but the recent crash of Terra USD (UST) has made investors cautious of such price changes.

Meanwhile, 3AC co-founder Su Zhu took to Twitter to claim the company was looking for a solution to the situation.

We are in the process of communicating with relevant parties and fully committed to working this out
— 朱溯 🐂 (@zhusu) June 15, 2022

As crypto trader MoonOverlord pointed out, Three Arrows Capital has now become the biggest dumper of Staked Ether, way ahead of Celsius.

Why is Celsius, 3AC insolvency problematic?

As mentioned above, the collapse of Three Arrows Capital and Celsius could have a lasting impact on the industry.

According to Twitter analyst DegenTrading, 3AC has borrowed funds from many of the major lenders in the market, including BlockFi, Genesis, and Celsius. So its foil-up will certainly have implications for them.

“3AC is one of the biggest borrowers/clients for the lenders globally. Their collapse would transfer the economic risk to their lenders. The lenders will bear the pnl difference between how much they are owed versus what they get in liquidating their collateral,”
he predicted.

Many of these market lenders are already in a tough place, thanks to the bear market and Terra ecosystem crash. Further stress on their balance sheet would leave them with little option but to withdraw credit from the system.

11/x – What this means is that lenders will protect themselves by withdrawing credit from the system. All the lenders probably have about 50bn (estimated) in loan creation…i expect 30-40bn of credit to be destroyed. i.e loans to be recalled and credit to be shrunk
— degentrading (@degentradingLSD) June 15, 2022

The situation Celsius finds itself in is not enviable either. Following the demise of the $60-billion worth Terra venture, the market hopes to evade another blow.

However, the fall of Celsius could spell further trouble for the decentralized finance (DeFi) ecosystem, according to market experts.

“A liquidation of Celsius’ assets would further rock the valuation of crypto assets, leading to a wider round of contagion within the crypto sphere,”
CNBC quoted Monsur Hussain, senior director of financial institutions at Fitch Ratings saying.

Meanwhile, Three Arrows Capital has been reportedly topping up its accounts on the DeFi platform AAVE to avoid liquidation.

This wallet (tagged as 3AC on Nansen) has been aggressively paying back AAVE debt against its 223k ETH / $264mm position to avoid liquidation. With $198mm in borrowings against it, @ a 85% liq threshold, a -11% move in ETH to $1,042 liqudates ithttps://t.co/y7yJJ0NlMc pic.twitter.com/2S55Rzl9Xc
— Onchain Wizard (@OnChainWizard) June 15, 2022

With the overall crypto market in limbo, the crash of DeFi giants Celsius and 3AC is bearish news. Could they recover? Time will tell.