Learnings from 3 Arrows Capital missing the mark [Finance Fridays]
The Crypto Hedgefund liquidated, causing a loss worth billions.
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The Crypto Winters get even colder huh,
I have just one question. To all you Twitter/Social Media gurus with ‘.eth’ in your profiles and a monkey profile picture, where you at now? Not going to go around talking how Web3 was the future and the BoardApeYacht Club will take over? Wasn’t the line going to straight up, all the way to the money.
Now that reality makes sense again (or more than it did before), I wanted to look into one of the biggest casualties of this winter. Three Arrows Captial (3AC) was a crypto hedge fund that was supposed to play a pivotal role in bringing Crypto mainstream. Instead, they saw the markets crashing, closed their multi-billion dollar hedge fund down, took the money, and disappeared. This caused a massive ripple effect, causing the entire industry to go crater straight to the Earth. For a fuller story check out the article- The Crypto Geniuses Who Vaporized a Trillion Dollars
3AC’s co-founders are believed to be in hiding, and lenders can’t get hold of the pair. According to New York Magazine, theories are floating around that the company borrowed money from individuals involved in organized crime and that’s why the co-founders have seemingly vanished without a trace. 3AC reportedly routed $32 million worth of stablecoins through the Cayman Islands, a location the ultra-wealthy often use as an avenue for laundering money due to its lax tax laws.
-There’s tons of interesting material on this. Source
To appreciate the lessons from this mess more slowly, make sure you’ve read the following Finance Fridays I’ve already done-
Why Tech and Crypto Stocks are so extreme [Finance Fridays]- I covered why Companies like Celsius which reported having millions of users could crash and declare bankruptcy in a month. Covered ideas like Blitzscaling and why VCs and Big Investors invest in terrible companies.
Lessons from the Crypto Bloodbath[Finance Fridays]- I explained the crypto sell-off and the factors that led to both the insane increase and decrease in valuations of the coins/firms.
Understanding the Tech Crash [Finance Fridays]- This is slightly older, where I analyzed the Tech Crash, why Companies were 'losing' Hundreds of Billions in a few days (valuations vs actual money), and the Boom and Bust Cycle of businesses.
If you’re an expert at those ideas/have read those, strap in because we got a wild situation to cover.
Key Highlights
Beware the revolutionaries- 3AC people claimed that this was a cycle to end all cycles. Anyone that knows anything about basic economics knows that boom-bust cycles are a part of the economy. If someone makes claims that they will completely upend the entire system, be very skeptical. Most likely, they will only flip over your bank account.
Ignore the ‘valuation’ Numbers- This might seem like a weird thing for a Data guy like me to say. However, as I’ve covered many times, what you’re fed as the value of a company is often just hype and marketing. Companies pay lots of accountants to manipulate the numbers in ways that work in their ways. Ignore the noise, focus on the fundamentals of the organization/industry. If you can’t explain to a 10 year old why a company/industry is good, you have no business putting money in it. Phrases like, “Look at the returns”, “Everyone else is doing it”, and “It’s the future” don’t count.
Pursue Decoupling- 3 Arrows put all their money into the Crypto Markets. An industry that has a lot of double accounting where everyone is taking money from everyone else. When the tides rise, everyone seems to be rising. But it is only when the waves crash that you realize that these people were swimming naked. There’s a reason that diversification is such a cliche in investing advice.
Basics beat everything- No amount of lipstick will turn a pig into Cleopatra. Good marketing/sales can generate noise but will not turn copper into gold. It can be tempting to get into something because of the hype about it being ‘the next big thing’. The only thing that will reliably win long-term is solid fundamentals. Whether it’s a field you want to transition into or a company you will work at/invest in to- look at the basics first. Don’t get into something just because it’s sexy.
For more examples of how this Crypto mania was fueled by hype and creative accounting, look read about the collapse of Voyager and Celsius, which left retail investors like you and I holding the bag. To those of you that want a summary of the 3AC situation (and want to learn about a Millionaire Baby), watch the video below. CoffeeZilla does a great job covering scams and financial problems in a clear and simple manner.
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