We're witnessing the biggest leverage reset in crypto history.

One of crypto's largest VCs 3AC is facing insolvency, which could spell disaster for the entire space.

🧵: The ULTIMATE thread on what led to the downfall of 3AC, and what it means for the future of crypto. 👇
2/ Three Arrows Capital (3AC) is a crypto venture capital fund, lead by @zhusu and @KyleLDavies.

At their peak they were managing an estimated $18b in assets, ranking them in the top 3 VCs in the space.

Some of their most successful investments include: $AVAX, $NEAR and $ETH.
3/ Unfortunately, a mix of poor risk management, greed and recklessness has lead to insolvency which has severe ramifications for the entire space.

A step-by-step summary of how it went down and what it means for crypto. 👇
4/ It all started when @zhusu deleted his Instagram and went radio silent on Twitter, causing rumours to spread about a potential 3AC margin call.

5/ Shortly after, it was revealed that 3AC had $245m of $ETH deposited in @AaveAave, of which they used as collateral to borrow $189m.

6/ Due to their illiquidity (many tokens were locked), they were unable to add collateral or pay off debt.

This lead to a liquidation cascade.

Many began to label their overuse of leverage as "irresponsible", as many positions were left exposed when the market started dropping.
7/ Things started to get worse.

It was revealed that 3AC was "leveraged long everywhere", resulting in a flurry of margin calls. Instead of answering these calls, they ghosted everyone, resulting in forced liquidations (leading to a broader market dump).

8/ It became evident that liquidity issues were worsening, as 3AC were seemingly forced to sell over 60k $stETH.

9/ As the $stETH saga unfolded, @zhusu finally confirmed the market's suspicions by publishing his first tweet since the fiasco commenced.

10/ The beginning of 3AC's woes can be directly tied back to the collapse of $LUNA and $UST.

• 3AC supposedly borrowed money off investors and deposited into Anchor (without informing them)
• Bought $560m worth of locked $LUNA
• That position then collapsed to a mere $600
11/ 3AC allegedly used counter-party funds to build a 9-figure $UST position in Anchor protocol, unbeknownst to its creditors prior to the collapse.

12/ There's speculation that these losses led 3AC to increase their appetite for leverage, as a form of "chasing losses."

Like many investors, VCs and asset managers like 3AC and Celsius got overconfident in the heat of the bull market.
13/ We see this a lot in poker, regarded as being "pot stuck."

When "effort or money already spent is causing you to stay around even though it's a losing proposition."

They kept putting money into the pot to recoup previous losses, resulting in exponentially increasing risk.
14/ As @VinnyLingham pointed out today: In crypto, you're already taking on significant risk as it is. Why add leverage and further compound said risk?

I think in the case of 3AC it's clear: Greed.
15/ So why does 3AC's insolvency spell disaster for crypto?

Because they borrow from almost every major lender.

FTX, Celsius, BlockFi, Nexo and BitMex to name a few.

If 3AC is unable to repay loans, all lenders inevitably take a hit. This kicks off somewhat of a domino effect.
16/ Unfortunately, the sheer size of 3AC's loans spell more trouble than your typical borrower.

If you take a $100k loan from a lender, you're f*cked.

If you take a $100m loan from a lender, the lender is f*cked.
17/ When lenders start to get affected, this is detrimental as it leads to increased collateral liquidations which has a negative price impact on related assets.

18/ However, some lenders have taken a prudent approach to recouping capital. BlockFi confirmed that they accelerated the loan via liquidation and hedging collateral.

19/ When it comes to managing assets, carelessness with your own money is one thing, but carelessness with an investor's money is another.

3AC had a responsibility to its stakeholders, and continued to act in a reckless manner.
20/ So is 3AC completely done? Well, for the most part it looks that way. However, there is a small chance they get acquired by another firm. FTX or Binance seem like logical suitors.

Although the damage has already been done.

21/ This is a list of 3AC's primary holdings.

Many unlocks are yet to come (on tokens that are still vesting). It's foreseeable that they look to exit many of these positions, so keep your eye on upcoming unlocks.

22/ @thedefiedge published a fantastic thread which outlines exactly what went down with 3AC.

23/ Backtracking to May: If it weren't for the collapse of $LUNA, it's very likely 3AC and Celsius wouldn't have reached this fate.

Since major players in the space are inextricably linked, contagion often finds a way to spread.

24/ Remember: There’s significantly more VCs, capital, and leverage in crypto now than there was in 2017.

This means the drawdowns are continuously becoming more extreme.

There's a lot of leverage left to be unwinded, and big players to be liquidated.
25/ Crypto was created as the solution to the pitfalls of centralisation.

Avoiding the over-leveraged, greedy and manipulative figures of Wall St was seen as one of decentralisation's greatest merits.

Recent events suggest we still have a ways to go.

26/ So what's next for crypto after 3AC's downfall?

Well, it would be naive to suggest the contagion has stopped.

3AC and Celsius are two of the first institutions to reach the brink of collapse, but will certainly not be the last.
27/ Unfortunately, these events are a bad look for the space and certainly hurt credibility.

But this great leverage reset is essential to ensure the long-term sustainability of the crypto market, as painful as it is in the short-medium term.
28/ If you enjoyed this thread, please give the 1st tweet a like and retweet. 💙

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More from @milesdeutscher

Jun 18
And there goes another one.. $MIM Image
.@danielesesta responded by saying that the “treasury has more money than debt.”

$MIM itself is overcollateralised, but the depeg is a function of users failing to pay down debt to bring $MIM back to peg.
Read 4 tweets
Jun 15
I keep seeing people trying to time the exact bottom. But historically, it’s been almost impossible to pinpoint.

We're constantly told not to "catch a falling knife", but this advice may be doing more harm than good.

🧵: Why “waiting for the bottom” may not be the best move.👇
2/ Catching a falling knife can be described as "an attempt to buy a rapidly declining asset near its lows."

When people tell you NOT to do this, what they're really saying is: Wait for an asset to bottom before accumulating.

But in a bear market, this logic is suboptimal.
3/ This is because bottoms are extremely hard to pick in crypto. If it were that easy, every single investor in 2018-2020 would be rolling in cash.

But the reality is, most either:

a) Lost interest in the market when things turned bearish, or
b) Waited too long to enter.
Read 20 tweets
Jun 10
Before I invest in any project, I ask myself these questions:

• Does it have runway to survive a bear market?
• Does it have VC/institutional backing?
• Are there developers building on it? (if it’s a chain)
• Does the token itself accrue value?
Once these questions are ticked off, I go into the more technical details:

• What’s the vesting schedule (and where are emissions allocated)?
• Is there an economic moat?
• What are their partnerships?
• Does the team have a proven track record, and are they doxxed?
Now, let’s make this actionable:

1. Formulate a list of criteria/questions that you value.

2. Create an excel spreadsheet, and create a new column for each project you’re researching.

3. Enter your observations and give each criteria a rating /10.
Read 4 tweets
Jun 5
Everyone says Twitter is the place to be in crypto. But you can't reap the rewards if you're not following the right people.

Following the brightest minds in the space can give you an edge to succeed in this market.

🧵: These are my must-follow accounts on Crypto Twitter. 👇
Learning the intricacies of TA is advantageous during current market conditions.

These are some of my favourite traders on Twitter:

Read 25 tweets
May 31
If you wish to be a successful crypto trader or investor, it is crucial to take a step back and analyse specific macro charts.

They'll give you guidance and perspective amidst market volatility.

🧵: These are the 4 charts you must keep your eye on over the coming months.👇
1. #BTC dominance is a measure that indicates what % of the total crypto market cap is comprised of Bitcoin.

It signals where capital is being allocated, and is a measure of consumer sentiment.

Dominance ⬆️ = Alts lose relative value to BTC
Dominance ⬇️ = Alts gain value to BTC
Over the last few weeks, investors have taken an increasingly “risk off” approach as capital reallocates from alts to “quality” crypto.

As a result, #BTC dominance recently broke its seven-month high of 45%.

A continued push upwards would likely see liquidity drained from alts.
Read 11 tweets
May 23
Let’s be honest, decentralisation in crypto is effectively a buzz word.

99% of projects are highly centralised and manipulated, with L1s turned on and off with the flick of a switch.

This is because in crypto we are striving for: The pursuit of decentralisation.
Decentralisation is the end goal, but we don’t fully know what that entails yet.

This journey takes time and most projects are still in their infancy.

Many of these projects would fail without VC backing and centralised jurisdiction to make decisions.
Look at some of the most popular chains: $SOL, $BNB, $FTM.

Still relatively centralised. But does that have a tangible impact on the performance of the product?

I’d argue no (at least in the short term).
Read 5 tweets

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