Something’s amiss at Singapore-based crypto hedge fund Three Arrows Capital, but it’s not yet clear whether that means the firm is insolvent, as the rumors spreading across the cryptosphere suggest.

The hedge fund, which was founded in 2012 and manages an estimated $10 billion, has positions in many of crypto’s largest projects and companies: Bitcoin, Ethereum, Solana, Axie Infinity, and BlockFi.

On Wednesday afternoon, it looked like Three Arrows Capital, which also goes by 3AC, had been selling off assets, including $40 million worth of its Lido Staked Ethereum (stETH). Researchers and analysts on Twitter have been saying it’s to keep a $264 million Aave loan and $35 million Compound loan from going into liquidation.

A crypto trader who goes by Moon Overlord on Twitter shared a screenshot from blockchain data platform Nansen showing that wallets associated with Three Arrows Capital were linked to five of the largest transactions in the past week and had exchanged at least 30,000 stETH.


Another crypto analyst, Onchain Wizard, estimated that if the price of Ethereum goes to $1,042, the loan would be liquidated.

There’s no question that the loans do exist or that they’re tied to an Ethereum wallet that people suspect belongs to 3AC. But the hedge fund hasn’t confirmed that it took the loans.


Early on Tuesday, Three Arrows Capital co-founder Su Zhu seemed to offer some reassurance that the firm is taking steps to keep itself afloat.

“We are in the process of communicating with the relevant parties and fully committed to working this out,” he said in a tweet, without identifying the parties or what needed to be worked out.

“It’s not like 3AC is saying, ‘Hey, that's definitely my address,’” Caleb Sheridan, Eden Network co-founder, told Decrypt. “But everybody believes that it's related to 3AC.”

The Eden Network is a protocol used by traders to guarantee placement of their transaction in a particular block on the Ethereum network. That can be especially valuable for people trying to mint an NFT before the supply runs out, make an arbitrage trade or, in this case, be first in line to liquidate what’s believed to be 3AC’s Aave and Compound collateral.

As the sharks circle the two loans, waiting for them to go into automatic liquidation, there’s never been a worse time to be trying to unload stETH.

Lido Staked Ethereum, which allows people to stake Ethereum and receive an equal amount of stETH in return, has been trading at a 6% discount. At the time of writing, 1 stETH could be traded for 0.94 ETH through Curve Finance

If the price of Ethereum drops low enough, the collateral used to secure the loans will be liquidated, or sold. And whoever manages to bid on the collateral first will score a 5% bounty. In simple terms, that means they’ll pay, for example, $100 million for $105 million worth of ETH.


If that happens, he said, it could be a Catch 22 for the person with the winning bid. They would need to swap the ETH for a coin that’s not seeing price volatility, like USDC, and soon, if they want to realize a return on the trade.

“You got this cascading effect,” Sheridan said, “where all of a sudden wherever you're liquidating ETH for USDC, you're going to have to do it in a clever way or you risk holding this asset that could keep falling in price.”

If the collateral securing those two loans does get liquidated, it’s bad for the lenders too. And that includes Celsius, which is already dealing with enough liquidity problems.

After all, as Twitter user degentrading pointed out, 3AC is one of the biggest borrowers and clients for crypto lenders. If 3AC goes down, it’ll send shockwaves out into the rest of the market and make the current downturn even more hellish.

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