Thread by Miles Deutscher
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- Jun 17, 2022
- #Cryptocurrency
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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. 👇
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.
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. 👇
A step-by-step summary of how it went down and what it means for crypto. 👇
4/ It all started when @zhusu deleted his Instagram and went radio silent on Twitter, causing rumours to spread about a potential 3AC margin call.
5/ Shortly after, it was revealed that 3AC had $245m of $ETH deposited in @AaveAave, of which they used as collateral to borrow $189m.
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.
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.
7/ Things started to get worse.
It was revealed that 3AC was "leveraged long everywhere", resulting in a flurry of margin calls. Instead of answering these calls, they ghosted everyone, resulting in forced liquidations (leading to a broader market dump).
It was revealed that 3AC was "leveraged long everywhere", resulting in a flurry of margin calls. Instead of answering these calls, they ghosted everyone, resulting in forced liquidations (leading to a broader market dump).
8/ It became evident that liquidity issues were worsening, as 3AC were seemingly forced to sell over 60k $stETH.
9/ As the $stETH saga unfolded, @zhusu finally confirmed the market's suspicions by publishing his first tweet since the fiasco commenced.
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
• 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
11/ 3AC allegedly used counter-party funds to build a 9-figure $UST position in Anchor protocol, unbeknownst to its creditors prior to the collapse.
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.
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.
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.
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.
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.
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.
17/ When lenders start to get affected, this is detrimental as it leads to increased collateral liquidations which has a negative price impact on related assets.
18/ However, some lenders have taken a prudent approach to recouping capital. BlockFi confirmed that they accelerated the loan via liquidation and hedging collateral.
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.
3AC had a responsibility to its stakeholders, and continued to act in a reckless manner.
20/ So is 3AC completely done? Well, for the most part it looks that way. However, there is a small chance they get acquired by another firm. FTX or Binance seem like logical suitors.
Although the damage has already been done.
Although the damage has already been done.
21/ This is a list of 3AC's primary holdings.
Many unlocks are yet to come (on tokens that are still vesting). It's foreseeable that they look to exit many of these positions, so keep your eye on upcoming unlocks.
Many unlocks are yet to come (on tokens that are still vesting). It's foreseeable that they look to exit many of these positions, so keep your eye on upcoming unlocks.
23/ Backtracking to May: If it weren't for the collapse of $LUNA, it's very likely 3AC and Celsius wouldn't have reached this fate.
Since major players in the space are inextricably linked, contagion often finds a way to spread.
Since major players in the space are inextricably linked, contagion often finds a way to spread.
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.
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.
25/ Crypto was created as the solution to the pitfalls of centralisation.
Avoiding the over-leveraged, greedy and manipulative figures of Wall St was seen as one of decentralisation's greatest merits.
Recent events suggest we still have a ways to go.
Avoiding the over-leveraged, greedy and manipulative figures of Wall St was seen as one of decentralisation's greatest merits.
Recent events suggest we still have a ways to go.
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.
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.
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.
28/ If you enjoyed this thread, please give the 1st tweet a like and retweet. 💙
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riddles.eth @ethernaz
·
Jun 18, 2022
Very good read 👇🏽