After five weeks in hiding, the disgraced founders of Three Arrows have spoken out about the startling storm of their once-prosperous hedge fund, saying their poor crypto speculation has sparked cascading margin calls on loans they shouldn’t have made.
Zhu Su, 35, and Kyle Davies have been friends since high school. They built 3AC into a crypto-trading behemoth, and then its collapse drove creditors out of business and fueled a sell-off that resulted in huge losses for owners of bitcoin and other cryptocurrencies.
Kyle Davies and Zhu Su start this conversation in an undisclosed location, sometimes remorseful, sometimes defensive and self-protective. They describe a systemic failure of risk management in which easily liquid credit exacerbates the effects of bad bets.
They acknowledged that thunderstorms had caused a greater magnitude of pain, but mostly discussed the impact on the rest of the industry. They stressed that they had suffered huge losses while denying allegations that they had withdrawn from the Three Arrows before the thunderstorm. “People may say we are stupid. They may say we are stupid or delusional. Maybe I will accept it,” Zhu Su said, “but they say I pulled out before the thunderstorm, which is not true, in fact I Put more personal money into it.”
The advisers responsible for liquidating the fund said in a July 8 filing that Zhu Su and Kyle Davies did not work with them and that the founders’ whereabouts are unknown. Zhu Su said death threats forced them to go into hiding. “It doesn’t mean we’re not communicating with all the relevant authorities,” Zhu Su said in a phone interview with two lawyers for Davies and Solitaire LLP. “We’ve been communicating with them from day one.”
The pair declined to say where they were, but a lawyer on the call said their final destination was the United Arab Emirates, which has become a gathering point for the cryptocurrency industry.
Kyle Davies (left) and Su Zhu Su (right) at Three Arrows Capital in May 2021
In this interview, the former Credit Suisse trader details the events that caused his fund to storm, which itself set off a chain reaction that cost institutions and small speculators billions of dollars.
“The whole situation is regrettable,” said Kyle Davies. “A lot of people lost a lot of money.”
Leveraged Raising Meets Crypto Winter
Three Arrows’ creditors, recently registered in the British Virgin Islands, filed documents saying they were owed more than $2.8 billion in unsecured claims. That number is expected to rise significantly, court documents show. To date, liquidators overseeing the bankruptcy have controlled assets worth at least $40 million.
Zhu Su and Kyle Davies have long been among the most aggressive crypto bulls in an industry known for its extremes. Fueled by leverage, they put Three Arrows at the center of a series of thunderstorms. Those thunderstorms rocked crypto markets as prices fell from their highs this year to levels last fall. “We imagined ourselves in a market that didn’t happen in the end,” Zhu Su said.
“We ourselves definitely believe in the stories we tell,” added Kyle Davies. “We have all, almost all of our assets there. In good times, we do our best. In bad times, we lose the most.”
At the same time, they claim, they are not outliers. They describe one-way bets and easy borrowing, which were interconnected and then all stormed at the same time, leading not only to the demise of their fund, but the bankruptcy, distress, and relief of companies like Celsius Network, Voyager Digital, and BlockFi .
“It’s not surprising that companies like Celsius and ourselves have problems at the same time,” Zhu Su said. “We have our own capital, we have our own balance sheet, but we also take deposits from these lenders, and then we Generate revenue for them. If we all have this kind of business, then by necessity we will be doing similar deals.”
Three Arrows mail piles up in Singapore office
Zhu Su and Kyle Davies’ efforts to deflect blame stand in stark contrast to the pair’s previous campaigns to relentlessly tout crypto assets and demean critics. This week, creditors claimed the founders had paid a down payment on a $50 million yacht before the fund collapsed, angering Mr. Zhu Su again, a claim he said was part of a series of defamation campaigns.
“The boat was bought more than a year ago, commissioned and used in Europe,” Zhu Su said, adding that the yacht “has a complete source of funding.” He denies that he enjoys a lavish lifestyle, noting that he commutes by bike every day and that his family “has only two homes in Singapore”.
“We’ve never spent a lot of money at any club. You know, we’ve never been seen driving Ferraris and Lamborghinis,” Zhu Su said. “I think this smearing of us is just a classic playbook, you know, when this kind of thing happens, when capital collapses, these are the headlines that people love to see.”
LUNA’s long arm
Kyle Davies and Zhu Su admitted significant losses related to trading in LUNA and the now-defunct stablecoin USDT, saying they were surprised by how quickly these tokens collapsed.
“What we didn’t realize was that Luna was able to drop to zero within a few days and trigger a credit crunch across the industry, putting enormous pressure on all of our illiquid positions,” Zhu Su said.
In retrospect, Zhu Su thinks, the company may have been too close to Terra’s founder, Do Kwon.
“We started getting to know Do Kwon personally because he moved to Singapore. We just felt that this project was going to do very big things, and have already done very big things,” Zhu Su described the company’s miscalculation, “We Terra could have been attacked in some ways, as it should have seen, and it has grown too big and too fast.”
“For us, it’s very much like an LTCM (Long Term Capital Management) moment,” Zhu Su said. “We have different types of deals that we all think are good and other people have those deals. And then they’re all super fast. fell.”
One of the transactions involved an Ethereum-related token called staked ETH or stETH, designed to be a tradable proxy for ETH and widely used in decentralized finance. While every stETH can be exchanged for one ETH after the long-awaited ethereum upgrade goes into effect, the turmoil caused by Terra’s debacle sent its market value down. This, in turn, allows other investors to trade profitably from the widening gap, according to Zhu Su.
“Because Luna just crashed, it’s like a contagion, and people wonder if anyone is using leverage to go long stETH and will be liquidated as the market falls?”, Zhu Su said, “So the entire industry is actively looking for These positions, because they are essentially huntable.”
Still, the fund was able to continue borrowing from large digital asset lenders and wealthy investors until they themselves fell into crisis.
After the LUNA storm, Zhu Su said the lenders were “satisfied” with Sanjian’s financial position and allowed them to continue trading “as if nothing was wrong”. As court documents now show, many of these loans required very little collateral.
“During that time, we continued to do business as usual. But after that day, when Bitcoin fell from $30,000 to $20,000, it was very painful for us and ultimately sealed our failure.”
“If we played more of the game, we would see the credit market itself is a cycle, and you know, we might not be able to get extra credit when we need it,” Zhu Su said. “It caused big trouble.”
Another trade that turned back three arrows was long Grayscale Bitcoin Trust, or GBTC. This closed-end fund allows those who cannot or do not want to hold bitcoin directly to instead buy shares in a fund that invests in bitcoin. For a while, GBTC was one of the few U.S.-regulated crypto products, so it had its own market. It is so popular that its shares consistently trade on the secondary market above the value of the bitcoins it holds.
Grayscale allows big investors like Three Arrows to buy stocks outright by placing their bitcoins in trust. These GBTC holders can then sell their shares on the secondary market. That premium means that any sale can yield attractive profits for big investors. At the time of the last filing in late 2020, Three Arrows was the largest holder of GBTC, with a position valued at $1 billion at the time.
There’s one hurdle to that strategy, though: Shares bought directly from Grayscale are locked in for six months. This limitation becomes a problem from early 2021. Faced with stiff competition from similar products, GBTC’s price has slipped from a premium to a discount, with shares undervalued by the Bitcoin that backs it. Over time, the discounts got bigger and the so-called GBTC carry trade no longer worked, especially hurting investors who were using leverage to try to boost their yields.
In Zhu Su and Kyle Davies’ view, part of their success has driven GBTC and the herd mentality surrounding the deal.
Zhu Su said: “We managed to do it in the right window, and it was a very big profit at the time. Others imitated us and made that trade and not only lost money, but turned negative. Because everyone does it Now, the trust has given a discount, a discount that is far greater than everyone imagined.”
No risk, no reward
When asked what exactly went wrong with the company, Zhu Su pointed to the overconfidence created by the multi-year bull market. That confidence is not only in him and Kyle Davies, but infuses nearly all of the credit infrastructure in the industry. Because of the success of similar companies, lenders see value in them.
Zhu Su said: “They should have an idea of what they’re into, it’s a risky company. If you go to our website, we always have a ton of disclaimers about crypto risks. We’ve never had anything like simple gains. Brand yourself as risk-free that way.”
When crypto markets first started to crash in May, he said: “We met all margin calls. People are starting to understand that there are risks involved.”
In addition, the company’s lenders “make a lot of money when we’re doing well, because when we’re doing well, they can say, look, I’m making $200 million a year from Three Arrows’ financing business, Give me a multiple of 10,” Zhu Su said, “now my own company is worth $2 billion more or something like that. So the risk department is not wary of the risks we take.”
So what’s the next step? Currently, the two co-founders are heading to Dubai. Zhu Su’s main hope is to obtain a calm and orderly liquidation for their complex account of private assets.
“For Kyle and I, there are a lot of crazy people in the crypto space who are making death threats and other negative noises at us,” said Zhu Su. “We felt that if our personal safety could be guaranteed and we kept a low profile, it would be a good idea for everyone. are beneficial.”
Zhu Su added: “Given that we had planned to move our operations to Dubai, we had to get there as soon as possible to assess whether we could move as planned or better deal with future variables. The current situation is very fluid and the main focus is It is to help creditors pay.”
As for Kyle Davies, he said, “I have a feeling that my next year is for myself.”
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/three-arrows-zhu-sus-first-interview-after-thunderstorm-bull-market-overconfidence-misjudged-luna/
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