3AC is corrupted. What’s next for its multi-million dollar NFT collection?

Crypto Briefing explores whether Starry Night Capital will be forced to close its prestigious NFT collection and what impact such an event may have on the NFT space.

3AC Faces Liquidation

Three Arrows Capital is facing bankruptcy, but it is currently holding a multi-million dollar collection of coveted NFTs.

The troubled crypto hedge fund popularly known as 3AC first caused concern in the crypto community in early June when rumors circulated online that it had failed to meet margin requirements on several of its loans. June 17 told Kyle Davies, who founded the company with his classmate Su Zhu in high school in 2012. The Wall Street Journal that the fund considered asset sales and a potential rescue package to repay the debt. He also revealed that it had lost over $ 200 million in Terra’s collapse and the subsequent market breakdown.

It soon became apparent that 3AC was facing a serious financial crisis, which gave the fund few additional options drastic restructuring. On June 27, Voyager Digital issued a $ 665 million default notice. A court in the British Virgin Islands then ordered the company to liquidate its assets. 3AC filed for bankruptcy in New York last Friday.

Teneo Restructuring, the company tasked with winding up 3AC, leaves no stone unturned in its investigation of the fund’s illiquid assets. Last week, it was widely reported that Zhu had privately listed a property in Singapore that he and his wife had purchased for $ 35 million and allocated to their three-year-old son in December 2021. When liquidators turn their attention to 3AC’s assets, Starry Night Capital, the NFT fund set up by the company’s founders last year, could be their next target.

The night of the stars

Starry Night Capital was launched by Zhu and Davies in collaboration with the pseudonymous NFT collector VincentVanDough. The fund made its public debut at the height of a period of speculative NFT mania on August 30, 2021, and aimed to raise $ 100 million to invest in rare items from popular, sought-after collections, along with unique, culturally significant ones. – unique works by prominent NFT artists.

Before Starry Night was officially launched, 3AC had used its own funds to collect Art Blocks NFTs from renowned generative artists such as Tyler Hobbs and Dmitri Cherniak, along with other works from other in-demand collections such as CryptoPunks. 3AC’s acquisitions pushed the floor prices of many of these collections to new heights; When data on the chain revealed that the company had bought into top-level collections such as Ringers and Fidenza, other collectors rushed to copy them, which helped their prices rise.

However, the company’s biggest purchase had not yet arrived. On August 27, the fund shocked NFT enthusiasts around the world when it purchased Ringers # 879 for 1800 ETH (worth about $ 5.9 million at the time) from fellow collector Peter Molick, known in the NFT area as pixelpete. Leaves the purchase to his Twitter followers, Zhu twitret a picture of the striking NFT with the caption “Thesis: we like the Goose.”

Ringer’s # 879 sale was a record-breaking OpenSea NFT sale at the time. But 3AC did not stop there. Under the Starry Night Capital banner, Zhu, Davies and Vincent VanDough continued to spend a lot of money on NFT art. The fund’s notable purchases included “Pepe the Frog NFT Genesis” purchased for 1000 ETH, XCOPY’s “DANKRUPT” purchased for 469 ETH, and Robbie Barrat’s “AI-Generated Nude Portrait # 7 Frame # 184” purchased for 300 ETH.

With so many unique, unique pieces, it’s hard to put a value on Starry Night’s collection at the top. CoinMetrics researcher Kyle Waters estimates the fund spent over $ 21 million on the NFT platform SuperRare alone. If we add thousands of ETH Starry Night that have fallen on other marketplaces such as OpenSea, the total consumption comes closer to the 100 million dollars the fund allegedly started with.

Despite evidence on the chain that Starry Night makes NFT purchases worth millions of dollars, only one company has publicly announced that they are investing in the fund as part of the $ 100 million fundraiser. KR1 PLC, a European investment company for digital assets, reportedly invested $ 5 million in Starry Night Capital to gain exposure to the fund’s portfolio of high-value NFTs. With this in mind, it is unknown how much of Starry Night’s liquidity came from 3AC and its founders, and how much was provided by external investors.

Starry Night Goes Dark

When the news of Three Arrows Capital’s liquidity problems circulated on social media in June, spectators closely followed the company’s associated projects to look for signs of contagion.

The first hint that Starry Night may face trouble came June 15, when Waters pointed out on Twitter that the fund had moved the entire collection of NFTs acquired through SuperRare to a new address. “The new wallet appears to have some connection to other 3AC wallets, but it’s so far unclear what’s going on,” Waters said, speculating that the transfers could have been made in preparation for liquidation or over-the-counter. counter sales to another party.

Since the details of the relationship between Starry Night and 3AC are still unclear, spectators have been left to speculate about the fate of the fund’s NFT. Some, such as Amatus’ head of trading strategies John Hartery, claim that Starry Night’s assets are in silo, which means that it will be unlikely that they can be used to service 3AC’s debt. While 3AC launched Starry Night, it is likely that the proceeds from any NFT sale will be distributed to the fund’s liquidity providers instead of 3AC’s creditors.

However, if 3AC contributed a significant amount of liquidity to Starry Night, liquidators could force the sale of some of the fund’s NFTs to liquidate its stake. To avoid such a situation, another party will probably have to agree to buy 3AC’s stake directly from them. Under the current circumstances, it seems unlikely that Starry Night’s NFTs will be discontinued in the near future. However, the opaque nature of the fund’s contracts and support, together with the recent wallet movements, means that a sale cannot be ruled out.

If Starry Night ever sells any of its NFTs, the collection has some way to go to reach its previous buying value, especially given the recent market conditions. Many of the fund’s NFTs have a certain historical significance or derive their value as unique examples from popular collections. When Starry Night bought pieces like “Pepe the Frog NFT Genesis” and AlphaCentauriKids “to death do us part”, it probably did so with the thesis that the crypto space would grow exponentially over the next few years, meaning early examples of unique NFT Art can be highly sought after. Previously, 3AC has discussed how it has usually adopted long-term prospects for its investments. Similarly, it is unlikely that Starry Night had any intention of selling pieces from their collection for many years – if ever.

Starry Night was launched during crypto’s so-called “NFT summer”, and the floor prices of most of the NFT collections it invested in have since fallen in ETH terms. ETH has also fallen in dollars, which means that NFTs that previously hit dizzying valuations are now trading for fractions of their all-time highs. In the current market downturn, a compulsory liquidation will almost certainly result in a significant realized loss for Starry Night and bring an untimely end to the fund’s pioneering investment strategy.

In the event that Starry Night is ordered to wind up, it could potentially give other collectors a once-in-a-generation opportunity to purchase some of the most coveted NFTs on the market at heavily discounted prices. However, such an incident will also send shock waves through the NFT area, and will probably push down floor prices for gatherings to which Starry Night is strongly exposed. While 3AC works through its liquidation, the NFT community will have to wait to see if one of the world’s most prestigious NFT collections will fall victim to what is without a doubt the toughest crypto bear market to date.

Neither Three Arrows Capital, Starry Night Capital or VincentVanDough had responded Crypto Briefing request for comment at press time.

Disclosure: At the time of writing this feature, the author owned BTC, ETH and several other cryptocurrencies.