The encyclopedia · Trading & Investing · Financial decision · 2022
Three Arrows Capital bet $10B on crypto — and the Terra collapse wiped it out in days
Three Arrows Capital, a $10B crypto hedge fund, was overexposed to Terra/LUNA and stETH. When Terra collapsed in May 2022, 3AC was liquidated within weeks.
Three Arrows Capital · 2022-06
What happened
Three Arrows Capital (3AC), founded by Su Zhu and Kyle Davies, was one of the largest crypto hedge funds, managing approximately $10 billion at its peak. The fund was heavily exposed to Terra/LUNA and staked Ether (stETH), and it had borrowed extensively from crypto lenders.
When Terra collapsed in May 2022, 3AC's positions were devastated. The fund could not meet margin calls, and its lenders — including Voyager Digital and BlockFi — demanded repayment. 3AC defaulted on its loans, and a British Virgin Islands court ordered its liquidation in June 2022.
The collapse of 3AC triggered a cascade of failures across the crypto lending ecosystem: Voyager Digital, Celsius Network and BlockFi all filed for bankruptcy in the following months. Zhu and Davies fled to Dubai. The case illustrated how leverage and concentration in a single asset class can turn a market correction into a systemic collapse, and how the interconnectedness of crypto lending creates contagion risk.
Why it happened
- 3AC was overexposed to Terra/LUNA and stETH, with extensive borrowing from crypto lenders.
- The Terra collapse devastated 3AC's positions; the fund could not meet margin calls.
- 3AC's default triggered a cascade: Voyager, Celsius and BlockFi all failed.
- Zhu and Davies fled to Dubai; the fund was liquidated.
The lesson
Leverage and concentration turn a correction into a systemic collapse. 3AC borrowed heavily to bet on one asset class; when it fell, the leverage took down its lenders too.
Aftermath
3AC was liquidated. Voyager, Celsius and BlockFi filed for bankruptcy. Zhu and Davies were charged with contempt of court. The case prompted a re-examination of leverage and risk management in the crypto industry.
Sources
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