The lunatic under the mask of crypto genius and the trillions of dollars evaporated

The boat is beautiful: about 500 tons, with a 171-inch hull made of glass and steel, as immaculate as Santorini, and a swimming pool with a glass bottom. The ship will be inaugurated in July, when sunset dinners near Sicily and cocktails on the turquoise shallows off the coast of Ibiza are simply the perfect match for this ship. “Her” captain-to-be showed photos of the $50 million boat to friends at a party, boasting it was “larger than the yachts of all of Singapore’s richest billionaires” and described using a projector screen Plans to decorate the cabin so they can better display the collected NFT artwork.

The $150 million superyacht is the largest yacht sold in Asia by established boat maker Sanlorenzo, and it’s a spree for cryptocurrency “upstarts.” “This represents the beginning of a fascinating journey,” the yacht broker said in last year’s auction announcement, adding that it “looks forward to witnessing many happy moments on board.” Culture and interesting enough name – Much Wow.

Her buyers, Su Zhu and Kyle Davies, are two Andover University graduates who run a Singapore-based crypto hedge fund called Three Arrows Capital. However, they couldn’t wait to open the champagne on Much Wow’s bow. Instead, in July of this year, the same month the ship was due to launch, the pair filed for bankruptcy and went missing before the final payment was made, leaving the ship “abandoned” in La Spezzi, on the Italian coast. Asia’s berth. Although she has not yet been officially listed for resale, the luxury yacht has already appeared in the circle of international superyacht dealers.

Since then, the yacht has become an endless stream of memes and after-dinner chatter on Twitter. From millions of small-scale cryptocurrency holders to industry practitioners and investors, nearly everyone in the world witnessed Three Arrows Capital in shock or dismay — the once potentially booming global The moment of collapse for the most admired investment fund in the financial industry. The company’s thunderstorm has had a series of effects that not only forced a historic sell-off in Bitcoin, but also “destroyed” a lot of the “achievement” of the crypto industry over the past two years.

Several New York and Singapore-based crypto firms were direct victims of the Three Arrows Capital thunderstorm. Voyager Digital, a New York-based publicly traded cryptocurrency exchange that once had a multibillion-dollar valuation, filed for bankruptcy protection in July, disclosing that Three Arrows Capital owed it more than $650 million. Genesis Global Trading provided a $2.3 billion loan to Three Arrows Capital. Blockchain.com, an early-stage cryptocurrency company that provided digital wallets and developed into a large exchange, had outstanding $270 million in loans from 3AC and had laid off a quarter of its workforce at the time of writing.

The brightest observers of the cryptocurrency industry generally believe that Three Arrows Capital is largely responsible for the cryptocurrency crash in 2022, as the market chaos and forced sell-off caused Bitcoin and other digital assets to plummet by 70% or more, to more than 10,000 The value of $100 million evaporated. “An estimated 80% of this slump is to blame for the 3AC thunderstorm,” said Sam Bankman-Fried, CEO of FTX, who has bailed out a number of bankrupt lenders over the past period, possibly more than anyone else. Understand the problems. “It’s not that the 3ACs are the only ones having problems, they just do it bigger than anyone else. Because of this, they gain more trust in the entire crypto ecosystem, which ultimately leads to more serious results. “

For a company that has always portrayed itself as only playing with its own money — “We don’t have any outside investors,” 3AC CEO Su Zhu told Bloomberg in February — the story came to an abrupt end. , the disruptive power of Three Arrows Capital is staggering. As of mid-July, creditors had filed more than $2.8 billion in bond claims, a figure that shouldn’t be the whole iceberg. From the best-known lenders to the wealthy investors, everyone in the crypto space seems to have lent their digital currency to 3AC, even 3AC’s own employees, who also deposit their salaries into their own platforms in exchange for interest. “A lot of people were disappointed, some of them were embarrassed,” said Alex Svanevik, CEO of blockchain analytics firm Nansen. “They shouldn’t do it because a lot of people’s lives could be ruined because of this, and a lot of people gave them money.”

That money now appears to have disappeared, along with the assets of several affiliated funds and some of the funding for various crypto projects managed by 3AC. The true scale of the losses may never be known, and for many of the crypto startups that deposited funds with the company, publicly disclosing the relationship could risk increased scrutiny from investors and government regulators. (For this reason, as well as the legal complexities of being a creditor, many who spoke about their experiences at 3AC asked to remain anonymous.)

Meanwhile, the unclaimed yacht appears to be a slightly ridiculous incarnation of the arrogance, greed and recklessness of the company’s 35-year-old co-founder. Su Zhu and Davies are currently in hiding as their hedge fund is in the midst of a chaotic liquidation process. (Multiple emails sent to them and their lawyers seeking comment went unanswered, save for an automated reply from Davies that read “Please note I’m out of the office right now.”) For an industry that constantly defends itself , cryptocurrency practitioners have been trying to prove that this is not a scam from day one, but Three Arrows Capital seems to have single-handedly proved the “opposite debater” point of view.

Su Zhu and Davies are two ambitious young people who are very smart and understand the structural opportunities of digital currency: cryptocurrency is a game of creating virtual wealth out of thin air and convincing others in traditional currency forms, they insist that those Virtual wealth should become real world wealth. They build social media credibility by taking on the role of billionaire financial geniuses, turning it into actual financial credit, and then borrowing billions of dollars for speculative investments, which they can help with through their large, influential platforms. Push successfully. Before you know it, pretend billionaires grow into real billionaires with the means to buy superyachts. They groped their way, but always seemed to get their plans to work perfectly until the end suddenly came.

The lunatic under the mask of crypto genius and the trillions of dollars evaporated

In 2005, Su Zhu and Davies were seniors at Andover University. Source: Phillips College

Su Zhu and Kyle Davies met at Phillips College in Andover, Massachusetts. Many of Andover’s children are known to come from wealthy or prominent families, but Su Zhu and Davies grew up in a relatively ordinary environment on the outskirts of Boston. “None of our parents were wealthy,” Davies said in an interview last year. “We’re very middle-class people.” They’re not particularly popular either. “They were all called weirdos, especially Su,” said one classmate. “Actually, they’re not weird at all—just shy.”

Su Zhu, a Chinese immigrant who came to the United States with his family at age 6, is known for his flawless GPA and heroic AP classes; he received the highest rating for “most diligent” in his senior yearbook. He won a special prize for his work in mathematics, but he’s not just a number geek—he also graduated with Andover’s top prize for fiction. “Su was the smartest person in our class,” recalls one classmate.

Davies is also a star on campus, but his classmates otherwise see him as an outsider—if they remember him. A budding Japanese, Davies graduated with the highest honors in Japanese. According to Davies, he and Su Zhu were not particularly close at the time. “We went to high school together, we went to college together, we got our first jobs together. We’ve never been best friends,” he said on the 2021 Crypto podcast. “I didn’t know him well in high school. I knew he was a Smart guy—he was like the valedictorian for our class—but in college, we had more communication.”

“College Together” was at Columbia University, where they both took math-heavy classes and joined the squash team. Su Zhu graduated with honors a year early, then moved to Tokyo to trade derivatives at Credit Suisse, with Davies following him as an intern. Their desks were next to each other until Su Zhu was fired in the financial crisis and joined a high-frequency trading platform in Singapore called Flow Traders.

There, Su Zhu learned the art of arbitrage — trying to capture small changes in the relative value of two related assets, usually by selling overpriced assets and buying underpriced ones. He specializes in exchange-traded funds (basically, mutual funds that go public like stocks), buying and selling related funds for a small profit. He excels at this, topping Flow’s profitability rankings. This success gave him new confidence. He has been known to be outspoken in his criticism of colleagues’ performance, even blaming his boss. Su Zhu stands out in another way: Flow’s office is full of servers and it’s hot, and he’ll come to work in shorts and a T-shirt, then take off his shirt, not getting dressed even as he walks through the halls of the building. “Su would walk around topless in his mini-shorts,” recalls a former colleague. “He’s the only one who can take off his shirt and trade.”

After Flow, Su Zhu spent a stint at Deutsche Bank, following in the footsteps of crypto legend and billionaire co-founder of the BitMEX exchange Arthur Hayes. Davies stayed with Credit Suisse, but by then both were tired of the big banks. Su Zhu complained to acquaintances about the low quality of his bank colleagues, allowing people to lose the company’s money in transactions with little consequence. In his view, the best people have left the hedge funds, or are on their own. He and Davies, now 24, decided to start their own platform. “There’s little harm in leaving,” Davies explained in an interview last year. “Like, if we leave and really screw things up, we’re definitely going to get another job.”

In 2012, Su Zhu and Davies lived temporarily in San Francisco. Su Zhu and Davies pooled their savings, borrowed money from their parents, and raised about $1 million in seed funding for Three Arrows Capital. The name comes from a Japanese legend where a prominent daimyo or warlord taught his sons to distinguish between trying to break one arrow – effortlessly – and trying to break three arrows together – impossible.

Davies said on the podcast UpOnly that they doubled their money in less than two months. The pair soon headed to Singapore, where there is no capital gains tax, where by 2013 they had registered the fund and planned to give up their US passports and become citizens. Fluent in both Chinese and English, Mr. Su Zhu moves freely in Singapore’s social circle, occasionally hosting poker games and friendly matches with Davies. However, they seem frustrated with not being able to take Three Arrows Capital to the next level. At a dinner around 2015, Davies lamented to another trader how difficult it was to raise money from investors. Traders are not surprised – after all, Su Zhu and Davies have neither much pedigree nor much track record.

At this early stage, Three Arrows Capital focused on a niche market: arbitrage emerging market foreign exchange (or “FX”) derivatives – financial products pegged to the future price of a smaller currency (such as the Thai baht or Indonesian rupiah). In a recent Medium post, BitMEX’s Hayes wrote that entering these markets is “nearly impossible” to enter these markets, which depend on strong trading relationships with big banks. “When Su and Kyle told me how they got started, I was impressed by their rush into this lucrative market.”

At the time, foreign exchange trading was moving to electronic platforms, and it was easy to spot discrepancies or spreads between quotes from different banks. Three Arrows Capital has found its sweet spot to trolling and “picking them” when prices are wrong, often making just a few cents per dollar traded, as Wall Street puts it. It’s a tactic that banks hate — Su Zhu and Davies are basically grabbing money the institutions would otherwise keep. Sometimes, when banks realize they’ve misquoted Three Arrows Capital’s price, they’ll ask to amend or cancel the deal, but Su Zhu and Davies won’t budge. Last year, Su Zhu tweeted a photo of himself smiling in front of 11 screens in 2012. He appeared to refer to their forex trading strategy of picking bank quotes, writing, “Until you get in the wee hours of the morning. You beat five traders with the same offer at 2:30 and you survived.”

By 2017, banks were trying to stop this arbitrage. “Whenever Three Arrows Capital asked for a quote, all the bank FX traders said, ‘Fuck these guys, I’m not going to price them,’” said a former trader who was a counterparty to 3AC. Recently, there has been a joke among FX traders who knew about Three Arrows Capital very early on and are now a little gloat about seeing it go out of business. “We foreign exchange traders are partly responsible for this because we know these people can’t make money in foreign exchange,” the former trader said. “But when they came to crypto, everyone thought they were geniuses.”

The lunatic under the mask of crypto genius and the trillions of dollars evaporated

On May 5, 2021, as Three Arrows Capital’s fortunes peaked, Su Zhu tweeted photos of the firm’s early days in 2012, when he and Davies were trading in a two-bedroom apartment. There was a message in the tweet: Think how wonderful we have been to build a multi-billion dollar company from such humble beginnings. Source: Su Zhu Twitter

One basic thing to understand about cryptocurrencies is that, anyway, so far, it has been in the process of an extreme but roughly regular boom and bust cycle. In Bitcoin’s 13-year history, the 2018 bear market was particularly painful. After reaching an all-time high of $20,000 in late 2017, the cryptocurrency fell to $3,000 and thousands of smaller coins popped up in the market. It is against this backdrop that Three Arrows Capital turned its attention to cryptocurrencies, investing at such an opportune time that Su Zhu is often considered a genius (that is, he earned credit) because He accurately judged the bottom of that cycle. In later years, to the many impressionable crypto novices — even industry insiders — who followed Su Zhu and Davies on Twitter, it looked like brilliance. But in fact, the grasp of the timing that time may really just be luck.

With cryptocurrencies traded on exchanges around the world, the firm’s arbitrage experience came in immediately. A well-known trading strategy is called “kimchee premium” — it involves buying bitcoin in the U.S. or China and then selling it at a higher price in South Korea, where exchanges are more regulated, leading to higher prices . Back then, winning trade setups like this were plentiful and profitable. They are the livelihood of Three Arrows Capital, which tells investors that it pursues low-risk strategies designed to make money in both bull and bear markets.

Another type of crypto arbitrage might involve buying bitcoin at the current (or “spot”) price while selling bitcoin futures, or vice versa, for a price premium. “The fund’s investment objective is to achieve consistent market-neutral returns while maintaining capital,” 3AC’s official filing reads. Of course, investing with limited downside, no matter what the broader market is doing, is called “hedging” (hedge fund gets its name). But hedging strategies tend to strip the most money when executed at scale, so Three Arrows Capital started borrowing money and putting it to work. If all goes well, it could generate more profit than the interest it owes on the loan. It would then do it all over again, continuing to expand its investment pool, which would allow it to borrow even larger funds.

In addition to borrowing heavily, the company’s growth strategy relies on another plan: building a massive social media presence for the two founders. In the crypto space, the only social media platform that matters is Twitter. Many of the key figures in what has become a global industry are anonymous or pseudo-anonymous Twitter accounts with silly cartoon avatars. In an unregulated space without traditional institutions and the 24/7 disappearance of global markets, Crypto Twitter is the center of the arena, a clearinghouse for market-driven news and opinions.

Su Zhu has won a chance to enter the upper echelon of crypto Twitter. According to friends, Su Zhu has a clear plan to become a “Twitter celebrity”: it needs to tweet a lot, cater to the crypto masses with extremely optimistic predictions, attract a large following, and then become a top predator on Crypto Twitter, with Profit at the expense of everyone else.

Su Zhu gained 570,000 followers by promoting his theory of cryptocurrency “supercycles” — the idea of ​​a years-long bull run in bitcoin’s price, rising to millions of dollars per coin. “As the cryptocurrency supercycle continues, there will be more and more people trying to understand how far ahead they are,” Su Zhu tweeted last year. “The only thing that matters is how many coins you have right now.” and: “As the supercycle continues, the mainstream media will try to talk about how early whales had everything. The richest people in crypto now have close to zero net worth in 2019. I know someone ironically said that if someone lent them $50,000 more in the past, they’d have $500,000 more now.” Su Zhu keeps emphasizing this on the platform and on crypto podcasts and video shows: Buying , buy, buy now, the super cycle will drive you crazy one day.

“They used to boast that they could borrow as much as they wanted,” said a former trader who knew them in Singapore. “It’s all planned, man, from the way they build their credibility to the way the fund is structured.”

As it grew, Three Arrows Capital expanded from Bitcoin to a series of start-up crypto projects and more obscure cryptocurrencies (sometimes called “shitcoins”). The company appears to be fairly indiscriminate about these bets, almost as if they were a charity. Earlier this year, Davies tweeted: “It doesn’t matter what VCs invest in, more fiat currencies in the system are good for the industry.” 

Many investors remember the first time they sensed that Three Arrows Capital might be in trouble in 2019. That year, the fund began reaching out to industry peers, calling it a rare opportunity. 3AC invested in and sold a stake in a crypto options exchange called Deribit; the term sheet values ​​Deribit at $700 million. But some investors noticed that the valuation seemed to deviate — and found it was only worth $280 million. As it turns out, Three Arrows Capital is trying to sell some of its investments at a steep markup, essentially giving the fund a hefty rebate. In venture capital, it’s a sketchy thing that blinds outside investors as well as Deribit itself.

But the company is booming. During the pandemic, cryptocurrency markets have rallied for months as the Federal Reserve pumped money into the economy. By the end of 2020, Bitcoin had quintupled from its March lows. To many, it does look like a supercycle is kicking off. According to its annual report, Three Arrows Capital’s main fund has returned more than 5,900%. By the end of that year, it managed more than $2.6 billion in assets and $1.9 billion in liabilities.

One of 3AC’s largest positions — and a significant one in its fortunes — is a form of bitcoin traded on a stock exchange called GBTC (short for Grayscale Bitcoin Trust). The company has shed as much as $2 billion in GBTC by breaking away from the old formula of arbitrage profits. At the time, it was trading at a premium to regular bitcoin, and 3AC was happy to pocket the difference. On Twitter, Su Zhu frequently has bullish comments on GBTC, and has repeatedly observed buying it as “smart” or “smart.”

Su Zhu and Davies’ public profiles have become more extreme; their tweets have grown more flamboyant, and social acquaintances say they make no secret of their condescension to former friends and less wealthy contemporaries. “They don’t have much empathy for most people, especially ordinary civilians,” said a former friend.

Three Arrows Capital is known for high staff turnover, especially among traders who complain that they never get recognized for winning deals, but are insulted as stupid when they screw up – even with their salaries being withheld , the bonus has also been reduced. (However, 3AC traders are highly sought after in the industry; before the fund collapsed, Steve Cohen’s hedge fund Point72 was interviewing a team of 3AC traders to covertly poach members of its trading team.)

Su Zhu and Davies keep the company’s inner workings secret. Only the two of them can move funds between certain crypto wallets, and most Three Arrows Capital employees have no idea how much money the company manages. The friend said that while employees complained about the long hours, Su Zhu was reluctant to hire new people for fear that they would “leak commercial secrets.” In Su Zhu’s view, Three Arrows Capital is helping anyone who works for it. “Su said they should get paid for providing valuable learning opportunities to employees,” the friend added. Some business acquaintances in Singapore describe the 3AC founder as playing a role on the trading floor of the Wolf of Wall Street in the 1980s.

The pair, now married fathers with young children, have become exercise fanatics, exercising up to six times a week and following a calorie-restricted diet. Su Zhu reduced his body fat to around 11% and tweeted an “update” of his shirtless fight. A friend recalled calling his personal trainer “fat” at least once. When asked about his drive to become a “big guy,” Su Zhu told an interviewer, “I’ve been very weak for most of my life. After COVID, I found a personal trainer. I have two Kids, so it’s like waking up, playing with your kids, going to work, going to the gym, going home, putting them to sleep.”

While not yet billionaires, Su Zhu and Davies are starting to enjoy some of the luxuries of the super-rich. In September 2020, Su Zhu purchased a US$20 million mansion in the name of his wife, known in Singapore as a “premium house”. The following year, he bought another property in his daughter’s name for $35 million. (It was revealed that Davies also bought the mansion after becoming a Singapore citizen, but the house is still being renovated and he has not moved in.)

But from a human point of view, Su Zhu is still an introvert and doesn’t like small talk. Davies is an outspoken person in the company’s business dealings and networking events. Some acquaintances who met the pair on Twitter for the first time found themselves surprisingly low-key. “He was very dismissive of a lot of mainstream, popular stuff,” says a friend of Davies. When he got rich, Davies went to great lengths to buy and customize a Toyota Century, a simple-looking car that cost about the same as a Lamborghini. “He would be proud of that,” said another friend.

While Su Zhu and Davies are getting used to their new wealth, Three Arrows Capital remains a huge funnel for borrowed funds. The lending craze has swept the crypto industry as DeFi (short for “decentralized finance”) projects offer depositors much higher interest rates than traditional banks can offer. Three Arrows Capital will use its platform to hold cryptocurrencies belonging to employees, friends and other wealthy individuals. When lenders demand collateral from Three Arrows Capital, it is often rejected. Instead, it offered to pay an interest rate of 10% or more, higher than what any of its competitors were offering. As one trader put it, some lenders do not require audited financial statements or any documentation at all due to their “gold standard” reputation. Even with a large scale and sufficient capital,

For other investors, Three Arrows Capital’s need for cash is another warning sign. In early 2021, a fund called Warbler Capital, run by a 29-year-old Chicago native, sought to raise $20 million in a strategy that largely involved outsourcing its capital to 3AC. Matt Walsh, co-founder of cryptocurrency-focused Castle Island Ventures, couldn’t understand why a multi-billion dollar foundation like Three Arrows Capital bothered to put in such a small amount of money. “I sat there scratching my head,” recalls Walsh. “It’s starting to sound the alarm. Maybe these institutions are already insolvent.”

The trouble seems to have started last year, and Three Arrows Capital’s massive bet on GBTC is the crux of the matter. Just as companies reap rewards when they are at a premium, it pains when GBTC starts to trade below Bitcoin. GBTC’s premium is a result of the original uniqueness of the product – it’s a way to own bitcoins in your eTrade account without having to deal with cryptocurrency exchanges and esoteric wallets. As more people flocked to the industry and new alternatives emerged, that premium disappeared—and then turned negative. But many smart market players have seen this. “All arbitrage disappears after a point,” said a trader and former colleague of Su Zhu.

Davies, aware of the risk this poses to Three Arrows Capital, admitted in an episode of the Castle Island-produced September 2020 podcast that he expects losses on this part of the deal. But before the show aired, Davies demanded that the segment be removed. Three Arrows Capital’s GBTC shares were locked up for six months at a time — and while Su Zhu and Davies had an opportunity to exit sometime that fall, they didn’t.

“They have ample opportunity to escape,” Fauchier said. “I don’t think they’d be stupid enough to do it with their own money. I don’t know what’s controlling their minds. It’s obviously one of the first deals you want to be in and you don’t want to end up An exit.” Colleagues now say Three Arrows Capital is hanging on to its GBTC spot as it bets the SEC will approve GBTC’s long-awaited exchange-traded fund switch, making it more liquid and tradable and potentially eliminate Bitcoin price mismatches. (In June, the SEC rejected GBTC’s application.)

By the spring of 2021, GBTC had fallen below the price of Bitcoin, and Three Arrows Capital was hit hard. Still, the cryptocurrency endured a bull run that lasted until April, with Bitcoin hitting a record above $60,000, and Dogecoin surging in an irrational rally fueled by Elon Musk. Su Zhu was also bullish on Dogecoin, with reports that 3AC had about $10 billion in assets at the time, citing Nansen as saying (though Nansen’s CEO has now clarified that most of the amount may have been borrowed).

In retrospect, Three Arrows Capital appears to have suffered a fatal loss — if a human one, not an economic one, later that summer. In August, the fund’s two minority partners, who were based in Hong Kong and worked 80 to 100 hours a week, managed most of 3AC’s business, retiring at the same time. That leaves much of their work to Davies, chief risk officer at Three Arrows Capital, who appears to have taken a more leisurely approach to finding the company’s tailwinds. “I think their risk management was much better before,” the former friend said.

Around that time, there were signs that Three Arrows Capital was facing a cash crunch. When a lender asks for collateral for the fund’s margin trades, it typically pledges its stake in private firm Deribit, rather than an easy-to-sell asset like bitcoin. This illiquid asset is not ideal collateral. But there was another hurdle: Three Arrows Capital co-owns shares of Deribit with other investors who refused to sign an agreement to use their shares as collateral. Clearly, 3AC is trying to pledge assets it has no rights to — and is trying to do so over and over again, offering the same stake to various institutions, especially after Bitcoin begins to fall in late 2021. The company appears to have committed the same block of locked GBTC to several lenders as well. “We suspect that Three Arrows Capital is trying to put some collateral on multiple people at the same time,” said FTX CEO Bankman-Fried. “I would be very surprised if that was all the misrepresentation here; it would be a very strange one. Coincidence. I strongly suspect they make more.”

The bear market in cryptocurrencies tends to dwarf the volatility of any traditional financial market. The collapse was so severe that insiders called it a “crypto winter,” and the bear market could last for years. That’s where Three Arrows Capital found themselves in mid-January 2022, they couldn’t take it anymore, GBTC’s position ate a bigger and bigger hole in 3AC’s balance sheet, and most of its funds were Bundled in restricted stock of smaller crypto projects. Other arbitrage opportunities have dried up. In response, Three Arrows Capital appears to have decided to make its investments more risky in the hopes of getting a high score and getting the company back on its feet. “All they have to change is the excessive pursuit of returns,” said a leading lending executive. “They might say, ‘What if we do too much?'”

In February, Three Arrows made its biggest move yet: it poured $200 million into a popular token called Luna, created by a brash, glamorous South Korean developer and Stanford dropout Do Founded by Kwon.

Around the same time, Su Zhu and Davies were planning to abandon Singapore. They have moved some of the fund’s legal infrastructure to the British Virgin Islands, and in April, Three Arrows Capital announced it would be moving its headquarters to Dubai. That same month, Su Zhu and Davies bought two villas for a total of about $30 million, friends said, one on the Crystal Lagoon in Dubai’s District 1, a man-made sea larger than anywhere else in the world. Sapphire Oasis. Showing photos of the side-by-side mansion, Su Zhu told friends that he had purchased his new seven-bedroom property — a 17,000-square-foot yard — from the consul.

But in early May, Luna suddenly plummeted to near-zero levels, wiping more than $40 billion off its market value in a matter of days. Its value is pegged to a related stablecoin called terraUSD. Both currencies collapsed when terraUSD failed to maintain a peg to the US dollar. According to Herbert Sim, a Singaporean investor who tracks 3AC wallets, Three Arrows Capital’s holdings in Luna, once about $5 billion, “disappeared out of thin air” almost overnight, and a death spiral ensued. expansion.

Blockchain.com’s head of lending, Scott Odell, reached out to the company to understand the scale of its impact. After all, the loan agreement stipulated that Three Arrows Capital would notify Three Arrows Capital if its overall withdrawal rate reached at least 4 percent. “As part of a portfolio, it’s not that big anyway,” wrote Edward Zhao, a top trader at 3AC, according to the Blockchain.com release. Hours later, Odell sent a notice saying it needed to recoup a significant portion of its $270 million loan, which would be paid in U.S. dollars or stablecoins. This caught them off guard.

The next day, Odell contacted Davies directly, who succinctly assured him that everything was fine. He sent a simple one-sentence letter with no watermark to Blockchain.com, claiming that the company had $2.387 billion under management. Meanwhile, Three Arrows Capital is making similar representations to at least half a dozen lenders. Blockchain.com “now doubts the accuracy of this net asset value statement,” according to an affidavit contained in the 1,157-page document released by 3AC’s liquidators.

A few days later, Davies, instead of holding back, threatened to “boycott” Blockchain.com if it recouped 3AC’s loan. “Once that happened, we knew something was wrong,” said Lane Kasselman, chief commercial officer at Blockchain.com.

Inside the offices of Three Arrows Capital, the mood changed.

According to a former employee, Su Zhu and Davies used to hold regular pitches on Zoom, but they stopped showing up that month, and then managers stopped such scheduling altogether.

In late May, Su Zhu tweeted, which could also be his epitaph: “It’s a shame that the supercycle price argument is wrong.” Still, he and Davies acted calm as they It seems that every wealthy cryptocurrency investor they know has been called up to borrow large amounts of bitcoin and offer the same high interest rates the company has always had. “They’re clearly raising their profile as a cryptocurrency hedge fund after they already knew they were in trouble,” said a person close to one of the biggest lenders. In effect, Three Arrows Capital is looking for funding just to repay other lenders. “It’s robbing Peter to pay Paul,” Matt Walsh said. In mid-June, a month after Luna’s debacle, Davies told Blockchain.com’s chief strategy officer Charles McGarraugh that he was trying to find another lender to avoid liquidating his position.

But in practice, this financial turmoil tends to lead to a massive sell-off by all involved to raise cash to stay solvent. Three Arrows Capital’s position was so large that it actually started to hit the broader cryptocurrency market: 3AC itself and other panicked investors scrambled to sell and meet margin calls, which in turn drove down prices, forming a vicious circle. The drop sparked further losses as lenders demanded more collateral and sold positions when 3AC and others were unable to post, sending bitcoin and its peers to multi-year lows. The crash made global headlines as the overall value of the crypto market fell below $1 trillion from a peak of $3 trillion in late 2021. McGarraugh said Davies told him, “If the crypto market continues to fall, the 3AC has no chance.” That was the last time anyone at Blockchain.com spoke to Davies. After that, he and Su Zhu stopped answering their lenders, partners and friends.

Rumors that the company was going out of business quickly spread on Twitter, further fueling a larger cryptocurrency sell-off. On June 14, Su Zhu finally acknowledged the problem: “We are communicating with the relevant parties and working hard to resolve this issue,” he tweeted. Davies gave an interview to The Wall Street Journal a few days later, in which he noted that he and Su Zhu remained “believers in cryptocurrencies,” but admitted that “the Terra-Luna situation caught us by surprise.”

Su Zhu started trying to sell at least one of his top properties. At the same time, the company started moving money. On June 14, the same day that Su Zhu tweeted, 3AC sent nearly $32 million in stablecoins to the crypto wallet of a Cayman Islands-affiliated shell company. “It is unclear where the funds subsequently went,” the liquidators wrote in their affidavit. But there is a working theory. In the final days of Three Arrows Capital, partners reached out to every wealthy crypto whale they knew to borrow more bitcoin, while top crypto executives and investors — from the U.S. to the Caribbean to Europe to Singapore – where the 3AC is believed to have found a willing lender of last resort to organised crime figures. A lot of money owed to these characters could explain why Su Zhu and Davies went into hiding. These are also the types of lenders you want to get done before anyone else, but you may have to transfer funds through the Cayman Islands. “They gave [the money] back to the mafia,” said the former trader and 3AC business partner, adding, “If you start borrowing from these people, you must be desperate.”

After the crash, cryptocurrency exchange executives began to examine the traces they left behind. They were surprised to find that Three Arrows Capital had no short positions at all, meaning it had stopped hedging — the very foundation of their investment strategy. “It was easy to do,” said the lead lending executive, “and no trading desk knew you were doing it.” Investors and exchange executives now estimate that 3AC will be leveraged at about 30 percent of its assets by the end of the year. Three times, some even suspect the number could be higher.

Three Arrows Capital appears to have put all the money in mixed accounts — unknown to the owners of the funds — to take out of every single one to repay lenders. “They might be managing the whole thing on an Excel sheet,” Walsh said. This means that when 3AC ignored margin calls and hid from lenders in mid-June, those lenders, including FTX and Genesis, liquidated their accounts, unaware they were also selling assets belonging to 3AC partners and clients.

After the firm’s traders stopped responding to messages, lenders tried calling, emailing and messaging them on every platform, even contacting their friends and stopping by their homes before liquidating their collateral. Some peered through the door of 3AC’s Singapore office, where weeks of mail had been stacked on the floor. Just a few weeks ago, those who viewed Su Zhu and Davies as close friends and lent them money (even $200,000 or more) were outraged and outraged that they had not heard any mention of the fund’s troubles. betray. “They must be sociopaths,” said a former friend. “The numbers they reported in May were very, very wrong,” Kasselman said. “We strongly believe they committed fraud. There is no other way to say it — it was fraud, they lied.” Genesis Global Trading, which has lent the most to Three Arrows Capital of any lender, has raised a total of $1.2 billion claim. Others lent them billions of dollars, mostly bitcoin and ethereum. So far, liquidators have recovered only $40 million in assets. “They were obviously insolvent but kept borrowing, which looked like a classic Ponzi scheme,” Kasselman said. “The comparison between them and Bernie Madoff is not far off.”

We also saw something interesting when Three Arrows Capital filed for Chapter 15 bankruptcy on July 1 in the Southern District of New York. Even as creditors rush to file their claims, 3AC’s founders have gotten a head start: Su Zhu himself, who filed a $5 million claim on June 26, and Davies’ wife Kelly Kaili Chen, are at the top of the list of claims, She claims she lent nearly $66 million to the fund. But their claims have little evidence other than a single figure. “It’s a total joke,” Walsh said. While insiders were unaware of Chen’s involvement with the company, they believed she must be acting on Davies’ behalf; her name appears on various corporate entities, possibly for tax reasons. Su Zhu’s mother and Davies’ mother also filed claims, according to people familiar with the matter. (Su Zhu later told Bloomberg, “You know, they would say I absconded with my funds in the last period, when I actually put more of my personal funds into it.”)

Since the company filed for bankruptcy, liquidators have not been in touch with Su Zhu and Davies until press time and still do not know where they are, according to people familiar with the matter. The co-founders received death threats, their lawyers said. During an awkward Zoom conference call on July 8, participants using the usernames of Su Zhu and Davies logged in with their cameras turned off, even as the pair of BVI liquidators presented their avatars with dozens of problem, they also refuse to unmute.

Regulators are also taking a closer look at Three Arrows Capital. The Monetary Authority of Singapore – the country’s equivalent of the U.S. Securities and Exchange Commission – is investigating whether 3AC had “serious breaches” of its rules, and the agency has already been sanctioned for providing “false or misleading” information.

On July 21, Su Zhu and Davies were interviewed by Bloomberg “from an undisclosed location.” This interview is unusual for several reasons—Su Zhu protests headlines about his free-spending lifestyle by biking to work, skipping nightclubs, “only two homes in Singapore”—and working with partners Blame the 3AC’s collapse on their failure to foresee a possible fall in the cryptocurrency market. Neither mentions the term “supercycle”, but the attitude is clear. As Davies puts it, “We do very well when the market is good. It’s just that we lose the most in the bad.”

The pair also told Bloomberg they plan to go to Dubai “soon”. Their friends said they were already there. The oasis in the desert offers a particular advantage: the country has no extradition treaty with Singapore or the United States, lawyers say.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-lunatic-under-the-mask-of-crypto-genius-and-the-trillions-of-dollars-evaporated/
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