OCW: 3AC & Celsius Updates

Hello all,

I took the time to dig into the 1k+ page liquidation documents for 3AC so you don’t have to. Also will share some updated recovery plans from Celsius, and will be post a *paid* gaming project deep dive on Friday morning.

Highlights from 3AC’s Liquidation Docs:
A few days ago, someone leaked some of the liquidating proceeding documents for 3AC in the BVI courts. I dug through it, and will detail the timeline and other notable highlights from the leak.

If you are unaware, Three Arrows Capital was incorporated in 2012, originally starting in trading of traditional currencies in emerging markets. Over time they pivoted to equities and crypto, eventually solely focusing on crypto in 2018.

By the end of 2020, the firm had net assets of $703mm - also interesting to note that even back then they had $1.8bn in loans outstanding (these guys really like debt).

The documents show that in April 2022, the firm’s net assets under management had grown to ~$3bn. Notably, 3AC had ~$600mm of exposure to LUNA/UST prior to May 9th 2022, and this is what really pushed them over the edge.

So LUNA and UST swiftly go to zero (I wrote about the mechanics of the blowup here). What is really fascinating here is that Kyle Davies (3AC co-founder) told Blockchain.com that as of May 13th that they had $2.4bn of assets, and on a later call discussed that they had $2.3bn NAV vs. $2bn of borrowings. As crypto majors BTC fell 33% and ETH fell 50%, the firm was left insolvent by mid June 2022.

Before 3AC starts receiving margin calls, the firm transferred ~$32mm to the wallet of Tai Ping Shen, a Cayman Islands company owned by Su Zhu and Davies’ partner, Kelly Kaili Chen (who knows what is going on here).

According to the creditor list provided, 3AC had borrowed a notional principal amount of over $3.5bn, with the largest exposure coming from Genesis ($2.4bn) and Voyager ($650mm).

The margin calls started coming in June, with Genesis calling for $355mm in additional collateral.

Deribit (who 3AC also was invested in) had a net $80mm call to 3AC in mid June.

Even in mid-June, the firm was making last ditch efforts to borrow more money to stay afloat - they asked Genesis for another $125mm loan (to pay another lender) and at the same time asked HODLnauts for BTC & ETH loans.

Pretty crazy stuff. Other notable highlights in the leak was that the 3AC founders used borrowed money to put a down payment on a $50mm yacht.

And even the founders are claiming they loaned money to the 3AC management company, and are named as creditors with Su asking for $5mm + Chen Kaili Kelly saying they loaned $65mm in unsecured money to 3AC.

Celsius:
Looking through this bankruptcy presentation, gives a good overview of the Celsius meltdown from March to July 14 2022. Assets fell from $22bn to $4bn, driven by a fall in crypto assets from $14.6bn to $1.8bn (ouch). User liabilities fell from $16.5bn to $4.72bn.

In my last post, I tried to examine if “forced selling” is behind us, with one of the largest remaining overhangs being how Celsius’ crypto assets will be handled. Well in this presentation, it appears that the Chapter 11 plan will provide customers with the option to receive cash at a discount to their deposit or remain long crypto. Given a new source of capital likely is not going to come into the Celsius situation, both cash at a discount or crypto given to customers will likely remain to be a potential risk to the markets near term - cash at a discount will likely come from selling crypto assets, while customers that receive crypto still could sell at any point. If I come across any updates to the Celsius situation, I’ll be sure to share.

Closing remarks:
Contagion risks are starting to move behind us, with the only remaining forced selling catalysts are Celsius and the Mt Gox BTC unlock. While everything went through a “relief” pump, with ETH moving ~75% from the bottom and many alts multiples higher, I don’t think this is a time to FOMO into positions, as there are still broader macro risks to equities + risk assets. With that said, there is a lot of capital waiting to be deployed in both crypto ($153bn in stables) and fund manager positioning is at extreme risk averse levels (lower than 2008 levels).

We are hopefully past the “bottom” in crypto now, with peak fear and forced selling behind us, but we may chop around for awhile.

Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.