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What Really Happened? Events Leading to The Downfall of 3AC

Updated: Nov 11, 2022

There are many factors that caused 3AC to fall from managing 10 billion to filing bankruptcy within 3 months.


Key Takeaways

  • 3AC invested $559.6 million into LUNA and now it is worth just under $1,000.

  • GBTC was trading at a premium for years and institutions like 3AC are presented with arbitrage opportunities.

  • sETH de-pegged from ETH caused many investors to sell off causing more downside to the price.

  • 3AC was ordered to liquidate on 27 June 2022.

  • Voyager declared bankruptcy after the hedge fund failed to repay a $500 million loan.

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Rumors regarding about Three Arrows Capital's (3AC) possible insolvency were spreading in early June after they were discovered moving assets around to top-up funds on decentralized finance (DeFi) platforms in order to avoid potential liquidations as the price of Ethereum (ETH) was plummeting.

The once-popular cryptocurrency hedge fund with over 10 billion assets under management (AUM) at one point was then ordered to liquidate in June 2022. The founder, Su Zhu and Kyle Davies, prominent figures in the crypto space, "disappeared" after the incident.

What was 3AC?

Three Arrows Capital (3AC), co-founded by Kyle Davies and Su Zhu in 2012, was a cryptocurrency hedge fund based in Singapore.

3AC starting capital was $1.2 million and their first office was their living room. Within three years, the firm quickly grew from just the two of them to over 30 employees. Before Su Zhu realized the potential of cryptocurrencies in late 2017, they mainly traded traditional emerging currencies. In 2018, they transited (transitioned) from a traditional finance firm into a crypto-focused firm.

Riding along the wave of the bull cycle from 2019 to 2021, 3AC's crypto assets grew into billions of dollars. Their investment strategy was to focus on trading Bitcoin and Ethereum in the derivatives market before diversifying into equity rounds, game-fi, and NFTs.

In March 2022, a Blockchain analytics firm, Nansen estimated that 3AC was still managing about $10 billion in cryptocurrency assets. So how did 3AC fall from managing 10 billion to filing bankruptcy within 3 months?

Events Leading to The Downfall of 3AC

Terra Collapse

This is no surprise as many hedge funds are exposed to the Terra implosion. 3AC reported that they had an investment of approximately 200 million in Luna tokens in February but it is revealed by a whistleblower that 3AC actually bought around 10 million locked LUNA, currently known as LUNC, for $559.6 million. Currently, the investment is worth under $1,000.

The collapse of Terra also drove the price of Bitcoin (BTC) down as $3 billion worth of BTC had to be sold to defend the peg. This fueled the negative sentiment surrounding crypto and with the already negative macroeconomy, this leads to more selling, and the price of almost all cryptocurrencies tanked.

Discounted Grayscale GBTC

3AC was known as the largest holder of Grayscales Bitcoin Trust (GBTC shares). Grayscale allows institutional investors to get exposure to Bitcoin without actually having to own one, which means investors do not need to worry about buying, storing, and safekeeping the BTCs.

GBTC was trading at a premium for years and institutions like 3AC are presented with arbitrage opportunities. They would buy BTC, deposit it into Grayscale, and once the GBTC unlock period ends, they would sell to retail investors and institutions in the secondary market at a higher price. However, over the past few years, the Grayscale premium became a discount.

3AC view of this was that the discount would be reversed immediately the moment Grayscale filings, to convert its Bitcoin trust into an ETF, are approved. However, the continued widening of the GBTC discount worsened 3AC's position in GBTC, and finally, on 17th June 2022, when Bloomberg updated its GBTC holdings tracker, it has shown that 3AC was no longer listed as a holder. Many speculated that they were forced to liquidate all their GBTC due to all the margin calls and liquidations.

stETH Collapse

stETH is a derivative token that is closely pegged to Ethereum and designed to mirror its value as close as possible. Investors buy stETH to generate yield and would be able to redeem it for ETH once the network transit from proof-of-work to proof-of-stake.

When stETH’s price traded below ether’s, investors raced for the exit. A month later, stETH's value dropped further as a crypto lender, Celsius began halting account withdrawals. According to Nansen, on June 14, 3AC removed more than 80,000 stETH (more than $84 million) from the DeFi lending protocol Aave, converting them back to Ether at a lower price.


These events finally shine a light on the amount of leverage 3AC managed to amass. As 3AC’s position continued to worsen, they increased their risk in order to make some money back. This actually turns out to be a bad idea and they dug an even bigger hole for themselves.

They were served with a notice of default by Voyager Digital on June 27, 2022, for failing to make the required payments with a total worth of more than $665 million. On the same day, a British Virgin Islands court ordered 3AC to be liquidated.


The apparent insolvency of 3AC has affected lenders across the board, with Voyager declaring bankruptcy after the hedge fund failed to repay a $500 million loan. BlockFi's business also suffered after the crypto hedge fund defaulted on a $1 billion loan. The threat of contagion remained high after Voyager Digital and Three Arrows Capital declared bankruptcy within a week of each other, and prices remained low. Do you think that there will be more companies collapsing?

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