What Does the Collapse of Celsius and Three Arrows Capital Mean for the Industry?
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What Does the Collapse of Celsius and Three Arrows Capital Mean for the Industry?
If 3AC collapses, the impact would be enormous.
Navigating Web3 tides with focused insightsAuthor: Degentrading
Translation: TechFlow intern
First, if 3AC collapses, the impact will be enormous, because they borrowed from every well-known and well-capitalized lender. Think BlockFi, Genesis, Nexo, Celsius—each lender is expected to feel the shock from 3AC.
3AC’s assets—the last publicly reported figure was $18 billion—I strongly suspect their true net asset value was much lower at that time. There are rumors that while they’ve already liquidated some holdings, they still have staking positions on Deribit.
But let's use $18 billion for calculation: assume $9 billion is fair value of VC portfolio, and $9 billion is liquid capital.
Assume all these liquid assets are in the safest BTC (yes, I know they held altcoins, which performed terribly). From November 21 until now, their liquid capital would have declined by nearly 70%.
Their liquidity is worth at most $2.7 billion; factoring in altcoin risk, their real liquidity likely dropped to $1 billion or less. This aligns with reports suggesting they failed to meet margin requirements.
Failure to meet margin calls is a death knell for any hedge fund—whether crypto or traditional. Reports indicate they tried using Starkware equity as collateral.
3AC was one of the largest borrowers globally; their collapse transfers economic risk to their lenders. Lenders will bear the shortfall between what was owed and the proceeds from liquidating collateral.
These lenders were underprepared, running balance sheets of $10–20 billion with only about 5% equity buffers (the margin by which assets exceed liabilities), meaning defaults would cause severe equity erosion.
Not all lenders are equal. Celsius is the worst—it has already collapsed. I’m unsure about Nexo, BlockFi is also in bad shape, while Genesis might be the best among them.
This means lenders will protect themselves by withdrawing credit from the system. All these lenders may have around $50 billion (estimated) in loans outstanding… I expect 30–40 billion of credit to be destroyed—that is, loans called back and credit lines reduced.
When credit leaves the system, there is less money overall. With the same amount of assets but less money, asset prices decline.
Further, when credit is withdrawn, every participant’s balance sheet shrinks as risk assets are marked down, and market makers’ ability to provide liquidity diminishes.
Bid-ask spreads widen. For funds—amid rising volatility, they must de-lever their risk assets to maintain the same risk level. Additionally, will LPs be spooked by UST and now Celsius? Better prepare for redemptions and sell early.
In essence, the collapse of major funds and key lenders will shrink overall credit in the system and trigger sustained deleveraging. So far, we've seen orderly liquidations, but more deleveraging remains.
What price is reasonable? Honestly, I don’t know. We might need the casino owners to step in—after all, if your customers are dead, you need to wait for new ones before business picks up again.
However, if no one intervenes, we might see Bitcoin fall below $10,000. After all, we’ve had one bull run (QE, etc.), and now face a perfect storm of significant deleveraging across all financial assets (rate hikes, QT, inflation).
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