21 Jun 2022

Three Arrows Capital’s collapse: A grim end to the Zhupercycle

Overwhelming confidence, risk management negligence, and a chain of unfortunate events lead to the collapse of one of the industry's most renowned funds, Three Arrows Capital.
One of the most renowned funds in the crypto space, Three Allows Capital, collapsed during last week’s market meltdown. 3AC’s founder and CIO, Su Zhu, has long touted his view of the super cycle – a crypto market without any massive drawdowns, slow and steady, up towards the right. The last months have proven his thesis wrong, with bitcoin experiencing its worst quarter ever, and in late May, Zhu conceived that his view had been wrong.
worst quarter ever
* As of June 20th. Source: Tradingview (Bitstamp)
Q2 was a cocktail of unfortunate events for 3AC, leading the fund to experience continuous raw punches, eventually manifesting the fund’s demise. The arguably most punishing strike came with the collapse of Luna. 3AC had more than $200m worth of losses related to Luna and was caught off guard alongside Celsius and others – illustrating the broad contagion effects of Luna’s collapse. 3AC managed to cope through the initial Luna-induced collapse but had suffered severe losses. As markets failed to recover substantially post Luna and then further soured amid the surprisingly high CPI on June 10th, 3AC was rapidly pressured into default and was liquidated by a large undisclosed lender. 3AC’s reputation had granted the fund access to the holy grail of undercollateralized lending. Poor risk management would eventually become the final nail in the coffin for 3AC and further exacerbate the post-Luna contagion effects as venues strive to wind down the remnants of 3ACs positions. BlockFi and Genesis have announced liquidations and mitigations of losses, with Genesis’ CEO Michael Moro commenting that the losses may be netted against Genesis’s balance sheet. Deribit announced possibly distressed positions and net debts while remaining financially healthy even if debts are not repaid. FTX and Bitmex also confirmed liquidating 3AC. BitMEX is also reportedly owed $6m from 3AC.How 3AC’s counterparties handle the remaining debt is unclear. The implications and possible contagion effects might come to light in the coming weeks, and it could create a dicey environment for the already pressured markets. Let the collapse of Three Arrows Capital roar as a reminder of the importance of risk management, prudence, and the dangers of unabated pure conviction and confidence.
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