In the wide world of Web3, hacking attacks are far from the only threat you need to worry about with regard to the security of your assets. For some, particularly for those dealing with portfolios totaling in the millions, the biggest threat can be the market itself.
This is particularly true in the case of financial entities in Web3. Since its foundation in 2012, Singapore-based crypto hedge fund Three Arrows Capital (3AC) has amassed a portfolio of digital assets valued at over $10 billion during the peak of 2021’s bull market.
Following news from late June that they’d defaulted on a loan from Voyager Digital worth over $670 million in crypto, the company appears to have become insolvent. Immediately following their defaulted loan, a British Virgin Islands court ordered the immediate liquidation of the fund and its remaining assets.
This confirms rumors that have been circulating online over the last month of the fund’s swiftly deteriorating status. Recent court documents have also surfaced online showing that the fund has formally filed for bankruptcy under Chapter 15 of the U.S. bankruptcy code in light of its multi-national investor base.
The coming fire sale
Among 3AC’s high-ticket assets were $7.5 million in NFTs, according to a report on Dune. While this may seem like an insignificant amount compared to the billions in crypto managed by the fund, a sizeable chunk of its NFT collection consists of highly sought-after blue-chip NFTs. This includes a collection of ArtBlocksCurated NFTs totaling an estimated $2.5 million in value, and a CryptoPunks collection worth well over $3 million.
As 3AC continues its process of liquidation, you can expect to see pieces from its collection gradually re-enter the market. Notably, aside from acquiring high-value NFTs as investments under 3AC itself, the fund’s founders also linked up with noted collector VincentVanDough to start up Starry Night Capital, an NFT fund that hoped to pour $100 million into the NFT community via a series of high-value purchases. Most notably, this included the purchase of Ringers #879 for 1,800 ETH in August 2021, which at the time was valued at $5.9 million.
It should also be noted that even before the full extent of 3AC’s collapse was public knowledge, Starry Night Capital consolidated a large percentage of its multi-million dollar NFT collection into a single wallet in mid June, as if to prepare for the liquidation.
The first signs of trouble
On June 15, Zhu Su — one of Three Arrows’ co-founders — posted an ominous tweet stating that the crypto hedge fund was “fully committed to working this out.” Some users were quick to surmise that ‘this’ referred to the company’s rapidly mounting debt, mostly due in part to the plummeting value of its portfolio.
Known throughout the Web3 community for being remarkably bullish on Bitcoin, Zhu had proceeded to steer 3AC in a direction that would reflect that belief — through financing 3AC’s various investments in the Web3 sphere via some truly aggressive borrowing. While in the short-term, this allowed 3AC to expand its reach far and wide throughout the Web3 space, the success of this strategy was contingent on each of their investments appreciating in value.
Given the current state of both the crypto and NFT markets at large, this has left 3AC with no real way to pay back the significant amount of the debt it has taken on. Among 3AC’s investments was roughly $200 million in LUNA tokens, as stated by co-founder Kyle Davies in an interview with the Wall Street Journal.
Reportedly, Zhu and his family have left Singapore and are in the process of selling off their real estate assets in the country, which includes properties worth as much as $35 million and $20 million on the open market. Unfortunately, there’s speculation that these supposed sales won’t go towards repaying 3AC’s massive debt, and will instead be sent over to Dubai where Zhu is reportedly relocating to.
In addition to how 3AC’s insolvency has rippled throughout the global Web3 landscape, the fund has also come under fire locally. Just days earlier, 3AC faced censure from the Monetary Authority of Singapore due to how they exceeded the country’s $250 million assets under management (AUM) threshold at various points from July 2020 to August 2021.
Only time will tell what will happen next, and if any of these debts will ever be settled.