what's up guys and welcome back to wall street millennial on this channel we cover everything related to socks and investing as warren buffett famously said only when the tide goes out do you discover who's been swimming naked as a financial bubble inflates some people make obscene amounts of money just to lose everything when it finally bursts this has been true in financial markets throughout history from the dot-com bubble in 2000 to the subprime mortgage collapse of 2008. currently we are experiencing something of similar magnitude in the crypto market led by co-founder and ceo sue joo three arrows capital is a hedge fund which had an estimated 18 billion dollars of assets under management at its peak but instead of investing in stocks or bonds like most hedge funds three arrows invested in cryptocurrencies as well as decentralized finance protocols while this worked brilliantly during the pandemic bull run they've not had a great start to 2022. in late june it was announced that they defaulted on a 670 million dollar loan and are likely headed towards bankruptcy similar to the 2008 financial crisis the implosion of three arrows capital is causing contagion across the entire industry the loan that they defaulted on was from the crypto brokerage firm voyager digital which is listed on the toronto stock exchange the loan losses have put voyager on the brink of bankruptcy with its share price losing almost 100 of its value in a move that has become unsettlingly common in recent weeks voyager has placed limits on client withdrawals as they fear running out of cash another crypto platform called finblocks which offered an insane 90 apy to its customers also halted withdrawals as it turns out they too had significant exposure to three arrows capital in this video we'll look at how three arrows grew to be an 18 billion crypto hedge fund and how it all came crumbling down this video was brought to you by masterworks i found this heat map and thought it was very interesting apple red amazon red and needless to say crypto is even worse but look over there at that green while everyone else is down 20 30 or 40 percent our auction sales are up 32 for the year in fact the new york times recently called fine art bulletproof but art isn't just about stability art has outpaced the s p more than two times from 1995 to 2021. more importantly contemporary art has outpaced both gold and the s p when inflation is above 3 due to its increased demand as a hedge we see the same sort of resistance during the start of kovit when arts returns beat hedge funds real estate and private equity according to a 2020 report from city unfortunately up until recently most investors didn't have a crucial piece of the puzzle a way to invest in art but that's all changed thanks to a unicorn startup called masterworks they're securitizing paintings with the sec so their 450 000 plus members can add art to their portfolios through fractional investing and the track record speaks for its health so far each of the four paintings that they've sold after offering them on the platform have each delivered over 30 net returns to their investors so if you want to join hundreds of wall street millennial subscribers and myself already on masterworks you can skip the waitlist by clicking the link in the description below for vip access and now back to the video three arrows capital was founded by su ju and kylie davis sue had a background in the traditional finance industry having previously worked as a trader at deutsche bank he left to start his own fund which he named three arrows capital they mainly focused on trading currencies making bets on exchange rate movements while fx was their main focus sue was open-minded and always on the lookout for new opportunities at the time bitcoin was just a few years old and the market was still very primitive he realized that the trading price of bitcoin would sometimes vary widely between different exchanges so he started making arbitrage trades buying bitcoin on the cheap exchanges and selling them for a profit on the more expensive ones as the crypto market developed over the years he saw potential for crypto to disrupt the traditional financial system so he shifted the hedge fund's focus away from currency trading and went all in on crypto to say that sue was bullish on bitcoin would be an understatement he believed that we are on the cusp of a multi-decade super cycle which will see crypto completely dominate the financial industry as well as the economy as a whole theoretically crypto has many benefits over traditional forms of payments in terms of transaction fees and privacy he said that bitcoin would become the dominant store of value in the global base currency for example if you get paid forty thousand dollars per year at your job five years from now your employment contract may stipulate that you get two bitcoins per year if all transactions in the economy are based in bitcoin the price of bitcoin relative to the us dollar would become meaningless many bitcoin bulls have a price target of four hundred thousand dollars per coin while this might seem like an absurdly high target there is some economic justification all the mine gold in the world today is worth about 11 trillion dollars bitcoin bulls say that the digital coin serves as a store of value that is in many ways superior to gold because it is easier to store and transact with if bitcoin achieved the same market cap as gold this would translate to about four hundred thousand dollars per coin however sue took this price target to the next level he said that gold's 11 trillion dollar market cap is undervalued and that bitcoin would become far more important than gold is today he thought that we were only at the beginning of a crypto super cycle which will see the market cap go to 100 trillion or two and a half million dollars per coin as bitcoin grows institutional investors like banks pension funds and corporations will start to buy in in addition to buying stakes and coins they also invested in a wide range of decentralized finance protocols and even crypto focused video games for example they invested in the ave protocol which allows people to earn yield on their crypto with liquidity pools they also invested in the axi infinity plate to earn crypto video game having gotten in on the ground floor for many of the biggest crypto projects three arrows was one of the biggest beneficiaries of the crypto bubble of 2020 and 2021.

their assets under management swelled to 18 billion at the peak making them one of the largest if not the largest crypto fund in the world whenever an investor makes a huge profit in a short period of time it's almost always with the help of leverage three arrows capital was no exception they used their credibility in the industry to secure billions of dollars worth of loans from many of the largest institutions these included well-known crypto lenders like block pi genesis voyager digital and others they use this money to invest in various crypto projects over the past year three arrows capital made three major investments primarily responsible for its eventual implosion these were investments in terra luna staked ethereum and greyskill bitcoin trust we'll go through each of these investments one by one founded by a south korean technologist do quan tara luna was a project revolving around the algorithmic stablecoin ust ust gained popularity as it promised holders a 20 yield we made a full video a few weeks ago explaining why tara luna was completely unsustainable and destined to implode we've linked the video in the description below in february three arrows reportedly invested 500 million dollars into luna just a few months later the ust stable queen lost its one dollar peg catalyzing a death spiral for its sister lunacoin three arrows as 500 million dollars went to zero soon after the luna disaster they also started suffering losses on their staked eath position staked each or st eth for short is similar to a depository receipt that in theory should trade one for one with regular ethereum for a variety of reasons people lost confidence and sc east started trading at a discount while the discount isn't huge three arrows leveraged up their position so their losses were immense but perhaps their biggest loss came from their position in grayscale bitcoin trust or gbtc gbtc is a publicly traded security that is meant to track the price of bitcoin gbtc buys a stockpile of bitcoins they then sell shares which represent ownership in this stockpile the major exchanges have not allowed bitcoin funds of this nature so they instead went to trade on the over-the-counter markets many institutional investors are either not allowed to or don't want to hold bitcoin directly so they use gbtc to gain exposure for example kathy wood bought about 80 million dollars worth of gbtc in her rw new generation internet etf because of high demand from institutional investors gbtc has historically traded at a premium to its net asset value in 2017 the price of gbtc was more than double the value of the bitcoin that it represented in early 2021 canadian financial regulators started allowing bitcoin etfs to trade on the toronto stock exchange the new canadian etfs listed at their net asset value institutional investors sold their gbtc at a premium to buy the canadian egfs at net asset value predictably this selling pressure took the premium of gptc down to zero but it didn't end there the price kept declining and it started trading at a discount in 2021 greyscale started negotiations with the sec to allow them to convert gptc into an open-ended etf if they become an etf they can sell their bitcoin and buy back shares until a discount shrinks to zero sue saw this as a massive arbitrage opportunity buying gbtc at a discount is like buying a one dollar bill for 90 cents sue thought that they'd be able to gain approval and he could make a handsome profit once the discount disappears unfortunately the sec has still not approved the etf transition and the discount to net asset value continued to increase steadily today it stands at almost 30 percent we don't know exactly how much three arrows invested in gbtc but given sue's apparent high conviction in the trade and the massive amounts of leverage the firm employs it could have been huge by this point things were looking pretty bad in addition to the massive losses they were incurring on some of their arbitrage plays their regular crypto holdings were also tanking thanks to the broad crypto sell-off in late may sue put out a tweet saying that his bitcoin supercycle prediction was regrettably wrong and to say that it's wrong would be an understatement bitcoin's current level of twenty thousand dollars is less than one percent of his two and a half million dollar price target at this point three arrows as lenders started getting nervous and asked them to repay their loans but they'd lost such a huge amount of money and much of what they had remaining was locked up in various d5 protocols they simply didn't have the cash on hand in late june they officially defaulted on a 670 million dollar loan from voyager digital if three arrows is unable to pay back this loan voyager could be bankrupted these fears are reflected in its share price which is now basically worthless the crypto lending platform finn blocks also has outstanding loans made to three arrows they too look to be on thin financial heights as they recently put limits on customer withdrawals the way the three arrow collapse spread through the industry so quickly is eerily reminiscent of the 2008 financial crisis the investment banks and mortgage lenders were so entangled with each other that when one collapsed it put pressure on all their counterparties pointing the whole system at risk the meltdown only ended when the government stepped in to give hundreds of billions of dollars of taxpayer funded bailouts to keep the banks afloat fortunately the crypto market has very little interaction with the real economy if all crypto went to zero tomorrow a lot of people would lose a lot of money but it wouldn't cause an economic collapse there will be no bailouts all the leveraged crypto investors are in for a long winter and there's nobody to call for help alright guys that wraps it up for this video what do you think about three arrows capital how long will the crypto winter last let us know in the comments section below as always thank you so much for watching and we'll see you in the next one wall street millennial signing out.