The two co-founders of the recently bankrupt crypto hedge fund Three Arrows Capital (3AC), Su Zhu and Kyle Davies, broke their silence in a new interview with Bloomberg published three days ago. Zhu and Davies attribute the rapid collapse of 3AC to their overly optimistic speculations, with Zhu stating that they positioned themselves for market growth that did not occur.
In a lengthy interview, Zhu stated that it was no surprise that 3AC failed and filed for bankruptcy, just like Celsius and Voyager. They were not the only ones facing financial difficulties.
Lenders like Vauld and BlockFi are experiencing liquidity issues, while many large companies in the crypto industry, such as Coinbase, Gemini, OpenSea, and Blockchain.com, are announcing mass layoffs.
– We have our own capital, we have our own balance sheet, but then we also take deposits from these lenders and then generate returns on them. So, if we are involved in taking deposits and then generating returns, then that, you know, means that in the end we are doing similar business – said Zhu.
Trades That Cost 3AC
In the interview, Su Zhu and Kyle Davies attribute the collapse of 3AC to excessive exposure to Terra, staked Ethereum (stETH), and Grayscale’s Bitcoin Trust. In the case of Terra, Zhu mentioned that he initially did not see any ‘red flags’.
– We failed to realize that Luna was capable of falling to zero in just a few days and that this would catalyze credit pressure across the industry that would create significant pressure on all our illiquid positions. We started getting to know Do Kwon on a personal basis as he moved to Singapore. And we felt like the project would do very big things and had already done big things – added Zhu.
Another popular trade was staked Ethereum, or stETH. Each stETH will theoretically be able to be exchanged at a 1:1 ratio with Ethereum after the blockchain transitions to a proof-of-stake consensus mechanism in September.
However, one of the immediate effects of Terra’s collapse was that many began to pay attention to stETH and incorrectly started interpreting the parity that stETH has with Ether. The situation cannot be compared at all to the collapse of Terra’s stablecoin UST, as stETH is not a stablecoin. This attracted opportunistic traders to further amplify skepticism.
Zhu also attributed the collapse of 3AC to exposure to Grayscale’s Bitcoin Trust (GBTC), an investment product for institutional investors who want exposure to Bitcoin without the risk of direct holding. GBTC is currently trading at a 30 percent discount to Bitcoin.
Collaboration with Liquidators
Su Zhu claimed that the reason the founders of 3AC remained silent for the past five weeks was not because they were fleeing with capital, but because they felt their lives were in danger.
– For Kyle and me, there are so many crazies in crypto who have somehow threatened death. We believe it is in everyone’s interest if we can be physically secured and remain unnoticed – said Zhu.
Last Tuesday, Zhu broke a month-long silence on Twitter to post screenshots of a recent email from Advocatus Legal LLP, the firm hired by 3AC, which was sent to the legal representatives of the company’s liquidators, Teneo.
In the letter, 3AC’s lawyers asked the liquidators at Teneo whether they mentioned in their filing to the Bankruptcy Court on July 8, ‘threats of physical violence’ that the founders of 3AC and their families had received. 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, the pair is focused on fulfilling their obligations to creditors, and ultimately, relocating to Dubai, most likely due to its crypto-friendly regulatory approach.
Basic Rules of Investing and Trading
When it comes to professional hedge fund investors, most think of them as almost infallible and always right. However, in this case, 3AC did not adhere to the basic rules of investing and trading. They used too much leverage, believed in their hype about the ‘super cycle’ they created thinking that crypto would never fall more than 50 percent again, and therefore were not prepared for the decline that followed. They invested money larger than they were willing to lose and over-leveraged themselves.
With the listed mistakes, almost all retail traders and investors encounter them on their crypto journey. Although retail is said to always be late and ‘dumb’ compared to ‘professional smart money’, many retail traders will survive and remain in crypto, just as they have done for years after each major downturn.
