Three Arrows Capital blew through billions with risky cryptocurrency bets

The now-bankrupt Three Arrows Capital (3AC) presented signs of mismanagement before the cryptocurrency hedge fund’s ultimate collapse. A report from New York Magazine reveals that 3AC co-founders Kyle Davies and Su Zhu faced criticism from banks and other traders before the company even entered the crypto market.

In its early days, Singapore-based 3AC ventured into foreign exchange (FX) trading and reportedly practiced something called currency arbitrage, which allowed Zhu and Davies to profit from mispriced quotes from various brokers, even if it resulted in gains of only “fractions of one cent on every dollar traded.” In accordance New York Magazine, banks would sometimes try to contact 3AC in an attempt to cancel or adjust the trade, but the firm would refuse. Banks reportedly started cutting off 3AC by 2017.

“We FX traders are partly to blame for this because we knew these guys weren’t able to make money in FX,” one former trader told me. New York Magazine. “But when they got to crypto, everyone thought they were geniuses.”

When 3AC switched to trading crypto, it found success by applying the same principles of forex arbitrage to the market. But New York The magazine notes that investors began to realize that something “may be wrong” with the company in 2019, when it offered to sell its stake in a crypto options exchange, Deribit, for an inflated price of $700 million. In reality, the value of the investment was reportedly only $289 million, and 3AC “attempted to turn part of its investment into a steep markup, essentially giving the fund a huge setback.”

3AC’s co-founders later boasted of the firm’s $2 billion investment in GBTC (Grayscale Bitcoin Trust) – but the firm reportedly took too long to sell its position and saw the gains disappear. As reported by New York Magazine, Davies admitted he knew GBTC’s value would eventually fall during a podcast created by venture capital firm Castle Island, and later asked producers to cut that part out before the show went live (which they did).

3AC also bet big on Terra and its sister coin Luna, which crashed after falling out of the dollar party in May. Herbert Sim, a Singapore-based investor who tracked 3AC’s wallets, said New York Magazine that 3AC’s holdings went from about $500 million to just $604 in the wake of the collapse. In an interview with The The Wall Street JournalDavies and Zhu admitted that the company lost $200 million in investments, but said they “have always been crypto believers” and “still are.”

And that’s how we got here. 3AC filed for bankruptcy last month, collapsing cryptobroker Voyager Digital with it. Crypto billionaire and founder of the FTX exchange, Sam Bankman-Fried, blames 3AC for triggering a ripple effect that caused crypto companies to file for bankruptcy or freeze transactions. “I suspect they may be 80 percent of the total original infection,” Bankman-Fried said in a statement to New York Magazine. “They weren’t the only ones to blow out, but they did it a lot bigger than anybody else did. And they had a lot more trust from the ecosystem before that.”

3AC’s co-founders are believed to be in hiding and lenders are unable to get hold of the pair. In accordance New York Magazine, theories are floating around that the company borrowed money from people involved in organized crime, which is why the co-founders have apparently disappeared without a trace. 3AC reportedly routed $32 million worth of stablecoins through the Cayman Islands, a place the ultra-rich often use as a route to launder money because of its lax tax laws.

Last month, Zhu and Davies held an interview with Bloomberg from an “undisclosed location” and told the outlet they planned to go to Dubai, where the US or Singapore have no extradition agreements. The couple leaves behind a $150 million superyacht – called “Much Wow” in reference to the Doge meme — and a $30 million Singaporean mansion that Zhu is already looking to sell.