Three Arrows Capital Founders cites 3 key crypto trades that blew up the firm

The two co-founders of the recent 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 3AC’s rapid collapse to overoptimistic speculation on their part, and Zhu said that they “placed [themselves] for a kind of market that didn’t end up happening.” Davies reiterated: “We believed in everything to the fullest.”

In his lengthy postmortem, Zhu said it was not a surprise that 3AC folded and filed for bankruptcy, along with Celsius and Voyager.

They weren’t the only ones feeling the chill of a crypto winter.

Lenders such as Vauld and BlockFi have had liquidity problemswhile some of the names at the top—as Coin baseGemini, OpenSea and Blockchain.com advertise mass redundancies.

Zhu said: “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’re in the business of taking deposits and then generating returns, that means, you know, we end up doing similar trades.”

The speeds that sank the ship

In their interview, Su Zhu and Kyle Davies attribute 3AC’s collapse to overexposure to Terra, staked Ethereum and Grayscale’s Bitcoin trust.

Zhu said in the case of Terra, he initially saw no red flags: “What we didn’t realize was that Luna was capable of falling to effective zero in a matter of days, and that this would catalyze a credit crunch in the industry that would put significant pressure on all our illiquid positions.”

“We started knowing Do Kwon on a personal basis when he moved to Singapore,” Zhu said. “And we just felt that the project was going to do really big things, and had already done really big things. If we could have seen that, you know, that this was now like, potentially attackable in some ways, and that it had also grown, you know, too big, too fast.”

Another popular trade among the ailing crypto companies was betting Ethereum, or stETH. Each stETH will in theory be redeemable for one Ethereum after the network has migrated to one proof of effort (PoS) consensus mechanism in September.

However, one of the consequences of Terra’s collapse was that stETH began to do so misses its pin.

This attracted opportunistic traders to bet against the token: “Because Luna just happened, it was very much a contagion where people said, ‘OK, there are people who are also collateralized with long bets Ether versus Ether that will be liquidated as market going down?’ So the whole industry was effectively chasing these positions, thinking that, you know, that because it was essentially huntable.”

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 risk of holding it directly. GBTC is currently trading at a 30% discount to BTC.

Ghosting Zhu and Davies?

Su Zhu alleged that the reason 3AC’s founders have remained virtually silent for the past five weeks was not because they were running away with capital, but because they felt their lives were threatened.

“For Kyle and me, there are so many crazy people in crypto who made death threats or all this kind of noise,” Zhu said. “We feel that it is only in everyone’s interest if we can be physically secured and keep a low profile.”

Last Tuesday, Zhu broke his month-long Twitter silence to post screenshots of a recent email from Advocatus Legal LLP, the firm employed by 3AC, sent to legal representatives of the firm’s liquidators, Teneo.

In the letter, 3AC’s lawyers asked the liquidators at Teneo if they mentioned in theirs July 8 submission to the US Bankruptcy Court the “threats of physical violence” received by the 3AC founders 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 pair is focused on fulfilling their obligations to creditors, and eventually moving to Dubai, most likely due to their crypto-friendly regulatory approach.

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