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Some of the most costly and sought-after NFTs in the world are held by Starry Night Capital, the NFT fund established by Three Arrows Capital. Could Three Arrows’ art-focused fund be compelled to sell its assets as a result of its bankruptcy crisis?
Main Points
The pending liquidation of Three Arrows Capital may have an impact on its affiliated NFT fund, Starry Night Capital.
Starry Night Capital was established in August 2021 with a goal of investing $100 million in premium NFTs.
Although it is unclear at this time if Starry Night will have to liquidate its collection, a liquidation would probably result in a large realized loss for the fund.
Crypto Briefing investigates if Starry Night Capital may be required to sell its esteemed collection of NFTs and the potential effects such a development could have on the NFT market.
3AC Might Be Liquidated
Even though Three Arrows Capital is on the verge of going bankrupt, it is still hanging onto a multi-million dollar collection of valuable NFTs.
Early in June, allegations that the problematic crypto hedge fund known as 3AC had not complied with margin calls on some of its loans caused worry in the crypto community.
Kyle Davies, who formed the business with Su Zhu, a friend from high school, in 2012, told The Wall Street Journal on June 17 that the fund was examining asset sales and a possible rescue to pay off its obligations. He also disclosed that it had lost more than $200 million as a result of Terra’s demise and the ensuing market crash.
Quickly it became clear that 3AC was in a dire financial situation, leaving the fund with no choice except to undergo a radical restructure. Voyager Digital sent the company a $665 million notice of default on June 27. A British Virgin Islands court subsequently mandated that the company sell up its assets. On Friday, 3AC filed for Chapter 7 bankruptcy in New York.
Teneo Restructuring, the company in charge of liquidating 3AC, is looking into the fund’s illiquid assets in every possible way. It was widely reported last week that Zhu had advertised a Singapore house that he and his wife had bought for $35 million and planned to transfer to their three-year-old son in December 2021 on a private basis. Liquidators may move on to Starry Night Capital, the NFT fund established by the company’s founders last year, when their focus shifts to 3AC’s assets.
Luminous Night Capital
Zhu and Davies, together with the fictitious NFT collector VincentVanDough, created Starry Night Capital.
The fund, which made its public debut on August 30, 2021, during the height of a speculative NFT boom, planned to raise $100 million to invest in unique, culturally significant, one-of-a-kind works from well-known NFT artists as well as rare items from popular, sought-after collections.
Prior to the introduction of Starry Night, 3AC used its own money to acquire Art Blocks NFTs from renowned generative artists like Tyler Hobbs and Dmitri Cherniak as well as pieces from other popular collections like CryptoPunks. When on-chain data indicated that 3AC had invested in elite collections like Ringers and Fidenza, other collectors hurried to copy trade them, driving their values even higher. As a result, several of these collections’ floor prices reached new highs.
The company’s largest acquisition, though, was still to come. When the fund paid fellow collector Peter Molick, better known in the NFT community as pixelpete, 1,800 ETH (approximately $5.9 million at the time), on Aug. 27, it stunned NFT aficionados all over the world. Zhu published a photo of the eye-catching NFT with the comment “Thesis: we like the Goose,” teasing his Twitter followers about the acquisition.
At the time, the Ringers #879 sale broke all previous OpenSea NFT sales records. However, 3AC didn’t end there. Zhu, Davies, and VincentVanDough continued to make significant investments in NFT art under the Starry Night Capital brand. XCOPY’s “DANKRUPT,” which the fund purchased for 469 ETH, “Pepe the Frog NFT Genesis,” and other significant acquisitions and Robbie Barrat’s “AI-Generated Nude Portrait #7 Frame #184” bought for 300 ETH.
It’s hard to estimate the worth of Starry Night’s collection at its height since there are so many one-of-a-kind, distinctive items. According to Kyle Waters, a researcher at CoinMetrics, the fund alone spent over $21 million on the NFT platform SuperRare. When the thousands of ETH that Starry Night spent on other markets like OpenSea are added together, the whole expenditure approaches the claimed initial investment of $100 million for the fund.
Only one company has publicly declared participating in the fund as part of its $100 million fundraising, despite on-chain proof revealing Starry Night made NFT transactions totaling millions of dollars. KR1 PLC, a European investment firm for digital assets, allegedly invested $5 million in Starry Night Capital to acquire access to the portfolio of high-value NFTs held by the fund.
Given this, it is unclear how much of Starry Night’s liquidity was given by 3AC and its founders vs how much came from outside investors.
Starry Night Darkens
In June, when word of Three Arrows Capital’s financial problems spread on social media, observers kept a watchful eye on the projects the company was involved in in case the problems spread.
On June 15, Waters noted on Twitter that the fund had relocated its entire collection of NFTs obtained through SuperRare to a new location, providing the first indication that Starry Night may be having problems.
The transactions may have been made in advance of liquidation or over-the-counter sales to another party, according to Waters, who speculated that the new wallet seemed to have some connection to previous 3AC wallets.
Uncertainty over the link between Starry Night and 3AC has left observers wondering what will happen to the fund’s NFT. Some claim that Starry Night’s assets are compartmentalized, making it unlikely that they could be utilized to pay off 3AC’s debts. One such person is John Hartery, Head of Trading Strategies at amatus. Even though 3AC launched Starry Night, it’s probable that the NFT fund’s liquidity providers would receive the revenues from any sales, not 3AC’s creditors.
However, if 3AC made a sizeable liquidity contribution to Starry Night, liquidators could be forced to sell some of the fund’s NFTs in order to make its holding liquid. Another party would most likely need to come to an agreement to purchase 3AC’s interest directly in order to prevent such a situation. It is doubtful that Starry Night’s NFTs will be disposed of anytime soon given the current situation. However, a sell-off cannot be ruled out due to the fund’s contracts and backing’s opacity, as well as previous wallet movements.
Given current market circumstances, it will take some time for the collection to recoup its original purchase price if Starry Night ever sells any of its NFTs.
Many of the NFTs in the fund have some historical relevance or are valuable because they are rare samples from well-known collections. Starry Night likely made its purchases of works by AlphaCentauriKid’s “til death do us part” and “Pepe the Frog NFT Genesis” with the belief that the crypto industry would experience exponential growth over the coming years and that early examples of distinctive NFT art might become highly sought-after. 3AC has previously talked about how it usually has a long-term approach for its investments. In a similar vein, it seems doubtful that Starry Night ever intended to sell any items from its collection.
The floor prices of the majority of the NFT collections that Starry Night bought in have now fallen precipitously in ETH terms since its inception during the so-called “NFT summer” of cryptocurrency. NFTs that previously reached stratospheric prices are now selling for fractions of their all-time highs since ETH has also declined in dollar terms. A forced liquidation under the present market conditions would almost surely cause Starry Night to experience a sizable realized loss and prematurely put a stop to the fund’s innovative investment approach.
If Starry Night is forced to liquidate, it may provide other collectors a once-in-a-lifetime chance to acquire some of the most sought-after NFTs on the market at steep discounts. A similar incident, though, would also be shocking to the NFT market, perhaps driving down the floor prices for the collections to which Starry Night is particularly susceptible. The NFT community will have to wait to see if one of the most prominent NFT collections in the world will succumb to what is likely the worst crypto bear market to date as 3AC goes through its liquidation.
