- Three Arrows Capital may have to liquidate its associated NFT fund, Starry Night Capital.
- Starry Night Capital was founded in August 2021 and sought $100 million to invest in high-end NFTs.
- Whether Starry Night will be forced to sell its collection is not yet clear, but a liquidation would almost certainly result in a massive realised loss for the fund.
3AC Faces Liquidation
Three Arrows Capital is on the verge of bankruptcy, yet it is still holding onto a multimillion-dollar collection of sought-after NFTs.
In early June, rumors began to surface online that the crypto hedge fund had failed to meet margin calls on several of its loans. According to Kyle Davies, who co-founded the firm with his high school classmate Su Zhu in 2012, the fund was considering asset sales and a potential bailout in order to pay off its debts. He also claimed that Terra’s bankruptcy and ensuing market meltdown had cost the company over $200 million.
It soon became clear that 3AC was in the grip of a severe financial crisis, leaving the fund with few options besides drastic restructuring. On Jun. 27, Voyager Digital issued the firm with a $665 million notice of default. A British Virgin Islands court then ordered the firm to liquidate its assets. Last Friday, 3AC filed for Chapter bankruptcy in New York last Friday.
Teneo Restructuring, the firm tasked with liquidating 3AC, is investigating the fund’s illiquid assets. It was widely reported this week that Zhu had secretly listed a Singapore property he and his wife had bought for $35 million and given to their three-year-old son in December 2021. As liquidators turn their attention to 3AC’s assets, Starry Night Capital, the NFT fund established by the firm’s founders last year, might be the next target.
Starry Night Capital
Starry Night Capital was launched by Zhu and Davies in partnership with the pseudonymous NFT collector VincentVanDough. The fund made its first public launch on August 30, 21, at the height of a period of speculative NFT mania. It aimed to raise $100 million to invest in rare pieces from popular, sought-after collections, as well as unique, culturally significant, one-of-a-kind works by notable NFT artists.
Prior to the official debut of Starry Night, 3AC had been collecting Art Blocks NFTs from renowned generative artists like as Tyler Hobbs and Dmitri Cherniak, as well as works from other popular collections such as CryptoPunks. 3AC’s purchases helped drive up the floor prices of those collections; as on-chain data revealed that the firm had bought into top-tier collections like Ringers and Fidenza, other collectors rushed to copy trade them, helping their prices skyrocket.
However, the firm’s biggest purchase was yet to come. On Aug. 27, the fund shocked NFT enthusiasts worldwide when it bought Ringers #879 for 1,800 ETH (worth roughly $5.9 million at the time) from fellow collector Peter Molick, known in the NFT universe as pixelpete, for 1,800 ETH (about $5.9 million at the time). Zhu shared a picture of the stunning NFT to his Twitter followers with the caption “Thesis: we like the Goose.”
“Ringers #879” by Dmitri Cherniak (Source: Dmitri Cherniak/OpenSea)
The Ringers #879 sale set a new high for OpenSea NFT sales at the time. But 3AC didn’t stop there. Under the Starry Night Capital banner, Zhu, Davies, and VincentVanDough continued to spend big on NFT art. Among the fund’s notable purchases were “Pepe the Frog NFT Genesis” bought for 1,000 ETH, “DANKRUPT” by XCOPY for 469 ETH, and “AI-Generated Nude Portrait #7 Frame #184” by Robbie Barrat for 300 ETH.
With so many unique, one-of-a-kind pieces, it’s difficult to put a value on Starry Night’s collection at its peak. According to CoinMetrics analyst Kyle Waters, the fund spent more than $21 million on the NFT platform SuperRare alone. Adding the thousands of ETH Starry Night dropped on other marketplaces like OpenSea, the total amount spent comes closer to the $100 million the fund reportedly started with.
Despite on-chain evidence indicating that Starry Night purchased millions of dollars in NFT, only one firm has publicly announced investing in the fund as part of its $100 million raise. KR1 PLC, a European digital asset investment firm, reportedly invested $5 million in Starry Night Capital to gain exposure to the fund’s portfolio of high-value NFTs.
Starry Night Goes Dark
As news of Three Arrows Capital’s liquidity concerns spread on social media in June, onlookers kept a close watch on the firm’s affiliated projects to look for signs of contagion.
The first hint that Starry Night was having problems came on Jun. 15, when Waters tweeted that the fund had moved its entire collection of NFTs acquired through SuperRare to a new address. “The new wallet seems to have some linkage to other 3AC wallets but it’s unclear so far what’s going on,” Waters said, adding that the transfers could have been done in preparation for liquidation or over-the-counter sales to another party.
As the details of the relationship between Starry Night’s relationship with 3AC remain unclear, onlookers have been left to speculate over the fate of the fund’s NFT. Some, such as amatus’ Head of Trading Strategies John Hartery, argue that Starry Night’s assets are siloed, and so cannot be used to service 3AC’s debts. Though 3AC launched Starry Night, it’s likely that the proceeds from any NFT sales would go to the fund’s liquidity providers rather than 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 make its stake liquid. To avoid such a scenario, another party would likely need to reach an agreement to buy 3AC’s stake from them directly. Given the current situation, it seems unlikely that Starry Night’s NFTs will be liquidated in the near future. However, the opaque nature of the fund’s contracts and backing, paired with the recent wallet movements, means a sell-off cannot be ruled out.
If Starry Night ever sells any of its NFTs, the collection has some way to go to reach its previous purchase value, especially given recent market conditions. Many of the fund’s NFTs have historical significance or derive their value as unique items from popular collections. When Starry Night bought pieces such as “Pepe the Frog NFT Genesis” and AlphaCentauriKid’s “til death do us part,” it likely did so with the expectation that the crypto sector will grow tremendously over the next few years, making early examples of unique NFT art could become highly sought after. In the past, 3AC has discussed how it typically adopted a long-term approach for its investments. Similarly, it’s unlikely Starry Night had any intention of selling pieces from its collection for many years—if ever.
Starry Night debuted during cryptocurrency’s so-called “NFT summer,” and the floor prices of the majority of the NFT collections it invested in have since plummeted in ETH terms. ETH has also plummeted in dollar terms, which means that previously dazzling valuations of NFTs are now trading for fractions of their all-time highs. In the present market slump, a forced liquidation would almost probably result in a huge realised loss for Starry Night, bringing the fund’s pioneering investment strategy to an early end.
If Starry Night is ordered to liquidate, it may give other collectors with a once-in-a-lifetime opportunity to purchase some of the most desirable NFTs on the market at heavily discounted prices. However, such an event would also send shockwaves through the NFT industry, lowering floor prices for collections that Starry Night is heavily exposed to. 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 succumb to what is likely the harshest crypto bear market to date.