Five Arrows Finance: A Debacle in the Crypto World

Five Arrows Capital, better known as 3AC (Three Arrows Capital), was once a prominent and highly respected cryptocurrency hedge fund managing billions of dollars in assets. Founded in 2012 by Su Zhu and Kyle Davies, both former traders at Credit Suisse, 3AC initially focused on traditional finance before transitioning to the burgeoning crypto market. Their early success stemmed from arbitrage opportunities and strategic investments in various crypto projects, building a reputation for insightful market analysis and profitable trades.

However, 3AC’s risk management strategies proved to be fatally flawed. Their investment thesis centered around a “supercycle” theory, predicting a sustained and continuous bull market in cryptocurrencies. This led them to adopt aggressive leverage strategies, borrowing heavily to amplify their gains. They invested in a wide range of projects, including decentralized finance (DeFi) protocols and venture capital opportunities within the crypto space.

The cracks began to appear in 2022, coinciding with the collapse of TerraUSD (UST) and its sister coin LUNA. 3AC had invested heavily in UST, and the de-pegging event resulted in significant losses. This triggered a cascade effect, as other crypto lenders and platforms, also exposed to 3AC, faced their own liquidity issues. Voyager Digital, a crypto broker, was among the first to declare bankruptcy, citing 3AC’s failure to repay a substantial loan.

As market conditions worsened, 3AC faced increasing margin calls. The firm was unable to meet these obligations, leading to its own collapse and subsequent liquidation. Court documents revealed a complex web of interconnected loans and investments, highlighting the lack of transparency and oversight in the crypto lending ecosystem. The sheer scale of 3AC’s downfall sent shockwaves through the crypto industry, further exacerbating the already declining market sentiment.

The collapse of 3AC exposed several critical vulnerabilities within the crypto industry. It underscored the dangers of excessive leverage, inadequate risk management, and the interconnectedness of various crypto entities. Furthermore, it highlighted the need for greater regulatory oversight to protect investors and maintain stability within the market. The fallout from 3AC’s bankruptcy continues to ripple through the industry, leading to increased scrutiny and a more cautious approach to crypto lending and investment.