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Tryst With Leverge: How Three Arrows Capital Shattered Itself




VOC, Voice of Crypto, Three Arrows Capital, Crypto

The crypto industry was very much influenced by leverage. And Grayscale Bitcoin Trust (GBTC). When it was the time for scouting profits, GBTC was the avenue where the elite went shopping.

The Grayscale Bitcoin Trust is a digital currency investment product. Individual investors can buy and sell GBTC shares through their own brokerage accounts.

It is a publicly traded SEC reporting company on an over-the-counter market. Its success works in tandem with the performance of Bitcoin, the currency it solely depends upon.

The ‘Premium’ Party

The bull market and retail enthusiasm caused the Grayscale Bitcoin Trust to trade at a substantial premium to NAV for almost three full years. This resulted in one super lucrative opportunity for hedge funds: pseudo-arbitrage. This allowed some specific hedge funds to deposit their Bitcoins at GBTC against 20%-30% more shares of the Trust Fund.

Obviously, there was a catch. GBTC had a lock-up period of about six months, so it wasn’t exactly free money. As long as the premiums hold tight, it wasn’t a bad deal.


3AC and Its Tryst with Leverage.

But for hedge funds like 3AC, this wasn’t enough. They could have settled for a 40+% annualized return on their GBTC shares, but they went otherwise. 3AC levered their books by borrowing USD by pledging their GBTC shares.

The borrowed USD was then exchanged for UST (Terra’s stablecoin). The UST was then deposited on Anchor Protocol to pick up another 19% in yields.

Instead of hedging the GBTC risk, they amplified it.

What made 3AC miss out on was the perception of correlation between GBTC and Anchor Protocol. They both were being amplified by retail enthusiasm.

When the professional leverage piled up, retail demand spooked out, creating a default in trades by 3AC.

The ‘Un-Collateralized’ Drama

More or less like the financial crisis of 2008, the crypto lenders like Celsius, Voyager, and BlockFi let them take quite a lot.


Voyager, according to sources, lent to 3AC at a neat 12% ‘un-collateralized’ basis.

The positions that crypto funds financed eventually turned out to be too big for the market to bear.

But unlike the 2008 financial crisis, people had some anticipation of the housing bubble. But here in crypto, the market was significantly clueless about the impact of those two trades financed by 3AC.

Even there were few counts of Twitter users creating threads about Terra (LUNA) going south. Therefore one of the obvious thing was: An implosion was a possibility.

Surprisingly, 3AC, while buying UST against GBTC, was also buying Luna—the token that was existing to backstop the falling value of UST.

Moreover, it is deep into human psychology: when things are going well, the tendency to subscribe to wacky risks increases tremendously.


Since it was a bull market and the monkey brain watched others make money, the only way up is to limit up. Limit up the risk taken, limit the account leverage, and limit the exposure.

Not being able to cope up with extreme market movements, 3AC finally announced the filing for Chapter 15 Bankruptcy.

Jatin Sewani is crypto markets writer/reporter based in India. He is skilled in onchain as well as technical analysis. He's currently pursuing actuarial science which lets him look at things from a risk-based perspective.