The two co-founders of the recently bankrupt crypto hedge fund Three Arrows Capital (3AC), Su Zhu and Kyle Davies, have broken their silence in a new interview with Bloombergpublished today.
Zhu and Davies attribute the rapid collapse of 3AC to over-optimistic speculation on their part, with Zhu saying that they “positioned” [themselves] for a kind of market that ultimately never materialized.” Davies echoed, “We fully believed in everything.”
In their lengthy postmortem, Zhu said it was “no surprise” that 3AC, along with Celsius and Voyager, went bankrupt and filed for bankruptcy.
They weren’t the only ones feeling the chill of a crypto winter.
Lenders such as Vauld and BlockFi have suffered from liquidity problemswhile some of the names at the top like Gemini, OpenSea and Blockchain.com Announce mass layoffs.
Said Zhu: “We have our own capital, we have our own balance sheet, but then we also take deposits from these lenders and then we generate returns on them. So if we take deposits and then generate returns, that means, you know, we end up doing similar trades.”
In their interview, Su Zhu and Kyle Davies attribute the collapse of 3AC to overexposure to Terra, Ethereum expelled, and Grayscale’s Bitcoin trust.
In Terra’s case, Zhu said he didn’t see any red flags at first: “What we didn’t realize was that Luna was able to drop to effectively zero in a matter of days and that would trigger an industry-wide credit crunch. would put significant pressure on all of our illiquid positions.”
“We started getting to know Do Kwon personally when he moved to Singapore,” Zhu said. “And we just had a feeling that the project was going to do some really big things, and we’d already done some really big things. If we could have seen that, you know, this was potentially attack-prone somehow now, and that it had also, you know, grown too big and too fast.”
Another popular trade among the ailing crypto firms was deployed proof of commitment (PoS) consensus mechanism , or sETH. Each stETH will theoretically be exchangeable for one Ethereum after the network is migrated to a in September.
However, one of the knock-on effects of Terra’s collapse was that stETH kicked in miss his pin.
This attracted opportunistic traders to bet against the token: “Because Luna just happened, it was a contagion where people said, ‘Okay, are there people who are also long betting using Ether vs. Ether that will be liquidated as the market progresses down? ?’ So the whole industry was effectively chasing these positions thinking that, you know, because they could essentially be hunted.
Zhu also attributed 3AC’s collapse to exposure to Grayscale’s Bitcoin Trust (GBTC), an investment product for institutional investors who want exposure to Bitcoin without the risks of holding it directly. GBTC is currently trading at a 30% discount to Bitcoin.
Su Zhu claimed that the reason the founders of 3AC have remained virtually silent for the past five weeks was not because they fled with capital, but because they felt their lives were being threatened.
“Before Kyle and I, there are so many crazy people in crypto who made death threats or all this kind of noise,” Zhu said. “We believe it’s simply in everyone’s best interest if we can be physically secured and maintain a low profile.”
Last Tuesday, Zhu broke his months-long Twitter silence to post screenshots of a recent email from Advocatus Legal LLP, the company hired by 3AC, which was sent to legal representatives of the company’s liquidators, Teneo.
In the letter, 3AC’s lawyers asked Teneo’s liquidators whether they July 8 submission to the US Bankruptcy Court the “threats of physical assault” received by the founders of 3AC and their families.
So 3AC may be hiding from disgruntled investors, but they are no longer hiding from the public.
There is no doubt that this is the end of the road for the hedge fund; for now, however, the couple is focused on meeting their obligations to creditors and eventually moving to Dubai, most likely due to its crypto-friendly regulatory approach.