The Great Defeat of Sanjian Capital: The Top ETH Holder is Trapped in a Liquidity Crisis

Author: Shiwen, Qin Xiaofeng, Azuma, Odaily Planet Daily

Editor: Hao Fangzhou

The crypto market has fallen into panic, and negative news is gradually being realized.

Luna's collapse, Celsius's insolvency, stETH's decoupling… Accompanied by a series of bad news, the market continues to hit new lows without any rebound.

Today, a tweet from Three Arrows Capital founder Zhu Su has once again set the crypto community ablaze: "We are in communication with relevant parties and are committed to resolving the issues."

This news has sparked various speculations and "leaks" about Three Arrows Capital.

In fact, over the past few days, discussions about Three Arrows Capital's insolvency and liquidity crisis have been increasing and fermenting on Twitter. The discussions mainly focus on:

1. Their leveraged purchase of BTC, while BTC continues to decline, leading to margin calls;
2. Their continuous sale of stETH (in exchange for ETH) to repay debts;
3. Their prior investment in Luna (which has evaporated hundreds of billions of dollars).

Although Three Arrows Capital has not directly responded to the above claims, on-chain data (Three Arrows address liquidated a large amount of ETH, Three Arrows account huge losses) points to one thing—Three Arrows Capital is facing its darkest hour and may pull the trigger on a "market spiral decline."

1. The Prologue to Disaster

Why did Zhu Su post such a vague tweet? Let's first look at the comments from Danny, the trading head at 8BlocksCapital.

After Zhu Su tweeted "we are resolving the issues," Twitter user @Danny8BC stated that $1 million in his Three Arrows Capital trading account was withdrawn and demanded a prompt return.

As an investment institution that once managed over $10 billion, transferring funds without the authorization of partners inevitably raises suspicions. Has the usually "wealthy" Three Arrows Capital run out of liquidity?

In fact, there have been rumors in the market that Three Arrows Capital is suspected of facing operational and repayment issues due to the market crash. Since the collapse of LUNA in May, Three Arrows Capital has been frequently active. They have transferred large amounts of ETH to FTX and Bitmex, with approximately 162,629 ETH transferred out to date.

At the same time, Three Arrows Capital has also been selling stETH. When stETH "decoupled" to 0.94 ETH, Three Arrows Capital withdrew 127,000 stETH in liquidity from Curve (then worth $246 million).

Recently, the stETH decoupling event has escalated (for details, see "Why stETH is not the next UST"), with circular lending and liquidity shortages causing stETH/ETH to continue depreciating.

On-chain data shows that in addition to Celsius's frantic selling, Three Arrows Capital is also selling stETH through its sub-accounts and seed round investment addresses.

On June 14, an address marked as Three Arrows Capital exchanged 38,900 stETH for 36,718.64 ETH through Matcha (exchange rate approximately 0.94). Subsequently, Three Arrows Capital exchanged 17,780 stETH for 16,625 ETH, which was then all converted into nearly 20 million DAI.

According to PeckShield's monitoring, between 16:30 and 17:30 Beijing time, an address related to Three Arrows Capital (0x716034C25D9Fb4b38c837aFe417B7f2b9af3E9AE) liquidated 16,254 ETH.

In addition to stETH, Three Arrows Capital is also the largest holder of Grayscale Bitcoin Trust (GBTC) (holding 5.62% of GBTC shares at the end of 2020). During the ongoing market decline, this position has also shrunk significantly due to decoupling, and Three Arrows Capital is facing margin calls.

According to crypto trader degentrading, Three Arrows Capital has borrowing positions on multiple mainstream lending platforms (such as BlockFi, Genesis, Nexo, and Celsius). The Block also reported that Three Arrows Capital's $400 million position has been liquidated. At 17:14 Beijing time, Three Arrows Capital was liquidated again for 2,681 ETH. If the market continues to decline, it could trigger a large-scale chain liquidation, with widespread repercussions.

2. Three Arrows' Rise and "Dark History"

What kind of entity is Three Arrows Capital in the crypto market?

Three Arrows Capital was founded by Zhu Su and Kyle Davies in 2012 and has been investing in the cryptocurrency space, with a portfolio that includes BTC, ETH, AVAX, LUNA, SOL, NEAR, MINA, and other top Layer 1s. At its peak, it managed over $10 billion in assets and was one of the most active investment institutions in the cryptocurrency field.

Moreover, Three Arrows was also the first investor to hold more than 5% of GBTC shares, peaking at 6.26% at the beginning of 2021 (no updated data available).

The reason Three Arrows Capital is well-known in the market is due to the founder Zhu Su's high-profile and aggressive rhetoric. Many people first heard of them during the "Ethereum Debate" last November.

At that time, Zhu Su criticized Ethereum, claiming that the high gas fees made it unsuitable for new players; Ethereum community developers had become wealthy and forgotten their original intentions, needing a bear market to cool down, or to build a new blockchain that truly supports users elsewhere, and he clearly stated that he had once been a supporter of Ethereum but had now decided to abandon it.

As one of the biggest beneficiaries of the Ethereum ecosystem's explosion, Three Arrows' open resistance to Ethereum was met with backlash from Ethereum community members, including Vitalik Buterin, and ultimately Zhu Su softened and apologized, declaring the matter closed.

In reality, Zhu Su's attack on Ethereum was not unfounded; the core reasons were twofold: first, Three Arrows Capital had bet on Ethereum and had exchanged SOL for ETH before the Solana ecosystem exploded, leading to a disparity in returns; second, at that time, Three Arrows Capital had heavily invested in ecosystem projects of public chains like Avalanche and Solana, with Zhu Su's related tweets also supporting Avalanche, attracting Ethereum community builders and users to migrate to the new ecosystem, aligning with their own interests.

However, just half a month after the debate ended, Three Arrows "turned back." In early December, addresses marked as Three Arrows Capital continuously transferred over 100,000 ETH (approximately $400 million) from multiple trading platform addresses for several days. In response to this, Zhu Su tweeted that the 100,000 ETH purchased was "insignificant" and that he would buy more ETH in the future; he also stated that he would not abandon Ethereum and would continue to buy during market panic. Zhu Su's behavior of criticizing Ethereum one moment and then increasing his position the next was ridiculed on social media.

In the following months, Three Arrows Capital indeed fulfilled its promise, continuously increasing its ETH holdings as if it had "infinite bullets," gradually becoming one of the largest holders of ETH. At that time, the market was curious about where the funds for Three Arrows' accumulation came from. In hindsight, it was likely through circular collateralized lending, which set the stage for today's collapse.

The core reason for Three Arrows Capital's downfall is Zhu Su's misjudgment of the market, being overly optimistic about crypto finance and Bitcoin's trajectory, leading to poor decision-making and continuous leverage accumulation. When the market declined, they could only keep averaging down but still could not withstand the downward trend, resulting in liquidation.

In an interview with the UpOnly podcast last year, Zhu Su stated that if Bitcoin's market value reached that of gold, Bitcoin's price could soar to $2.5 million per coin. At the beginning of this year, Zhu Su tweeted, "I will only make one prediction for 2022, which is that at least 10 nation-states will make BTC legal tender." Additionally, Zhu Su proposed the concept of a "super cycle," believing that the crypto market would gradually rise in this market cycle, avoiding a prolonged bear market.

However, this year, as central banks around the world raised interest rates to curb inflation, global financial markets have continued to decline over the past few months, and crypto finance has also struggled to remain unaffected. Bitcoin has continued to fall, hitting a 19-month low, and Zhu Su's "super cycle" has become a joke. In a tweet at the end of May, Zhu Su wrote, "Unfortunately, the super cycle price theory is wrong, but cryptocurrencies will still thrive and change the world every day."

Since June of this year, the usually high-profile Zhu Su has become "silent," reducing comments on cryptocurrencies other than Bitcoin; even when discussing Bitcoin, he only lists favorable data to boost market confidence. On Twitter, he wrote, "My team tells me that the next 20,000 tweets should only be about Bitcoin." He also removed mentions of ETH, AVAX, LUNA, SOL, NEAR, MINA, etc., from his Twitter bio. Of course, in addition to poor decision-making, Three Arrows also seems to have lacked some "luck," coinciding with the largest collapse in crypto history—the Terra & UST crisis. In February of this year, Terraform Labs established LFG to support UST's peg, successfully raising $1 billion, led by Jump Capital and Three Arrows Capital; with the UST collapse and Terra's plunge, LFG's loss rate exceeded 90%, and Three Arrows also suffered heavy losses.

This collapse undoubtedly weakened Three Arrows Capital's risk resistance capacity, completely exposing it to the overall downward trend of the market.

3. The Possibility of a Death Spiral

Coincidentally, during the prosperous times of the crypto market, the high-profile heavy positions and loud bullish sentiments of institutions undoubtedly served as a "stabilizer" for all investors, but in today's declining market, the former bull market drivers have become a line of black swans, each holding a number that will be liquidated. What’s more frightening is that in the transparent financial system on-chain, the numbers on these tickets are visible to everyone.

In the face of various market speculations, Three Arrows Capital has yet to provide an official response. In the panic of liquidation and debt, will Three Arrows Capital face a death spiral? Will the market continue to decline? In the absence of accurate data and information support, some KOLs have also provided some judgments.

Degentrading believes that Three Arrows Capital is one of the largest borrowers/clients of global lenders. Celsius, BlockFi, Genesis, and others are all related to Three Arrows Capital, and this incident will transfer economic risks to their lenders. For example, Three Arrows holds a large amount of borrowing positions through CeFi institutions like Celsius, and once a complete liquidation occurs, it will not only bring greater selling pressure but may also trigger a more terrifying chain reaction, as the loss gap between their borrowing positions and collateral assets will be forced to be borne by these CeFi institutions, while institutions like Celsius are also struggling to survive…

Crypto KOL Jiang Zhuoer believes that Three Arrows will die, but the market has basically hit bottom, and the panic sentiment will gradually recover.

Regardless of how Three Arrows' endgame unfolds, the fact is that the market has fallen into panic. As of the time of writing, ETH has dropped below 1,100 USDT, currently reported at 1,024.01 USDT, with a 24-hour decline of 16%.

In today's gloomy market sentiment, no one can accurately predict the future market trend. This is the first major bear market after institutions entered the market en masse, but it is not the first time Bitcoin, Ethereum, and the crypto market have faced a tricky crisis.

We are confident that the market will eventually bottom out and rebound; this downturn may not be worth mentioning in the future's historical context. However, as ordinary investors, we must not easily judge short-term movements and heavily buy the dip. The crypto market is never short of opportunities, but we always seem to lack the bullets in hand.