Previously uncommunicative, the founders of cryptocurrency investment fund Three Arrows Capital (3AC) have spoken out. Faced with death threats, Su Zhu and Kyle Davies explain that they chose to remain hidden. They then went back to the reasons that led to the collapse of their company, which was one of the references among blockchain institutions.
The founders of 3AC give their vision of the situation
Since the beginning of the difficulties of the cryptocurrency investment fund Three Arrows Capital (3AC), its founders Su Zhu and Kyle Davies were particularly silent. They gave an interview to Bloomberg to try to explain the reasons for their failure.
Su Zhu first explains that death threats forced them to stay hidden. However, he insists that he and Kyle Davies have been cooperating with the relevant authorities since day one following the liquidation of the fund. There were also rumors that the founders of 3AC “left with the cash”, but it seems that the opposite is true:
“People can call us stupid […] or delusional. And, I’ll accept that. And, I’ll accept that. Maybe. But, you know, they’ll say I ran off with the funds during the last period, when I actually turned over personal money.”
Both partners declined to disclose their current whereabouts, but according to one of the lawyers present during the call, the United Arab Emirates would be the final stop.
Terra, the trigger
While the figures vary from source to source, Three Arrows Capital owes $3.5 billion to its creditors. The current situation is rooted in over-optimism on the part of Su Zhu and Kyle Davies.
The latter have indeed bet on a crypto-currency supercycle. This led them to borrow large sums of money in such a way that if their scenario had come true, they would have won big. The fact is that the fall in prices amplified the losses.
The collapse of Terra (LUNA) therefore put a stop to the fund’s momentum:
“What we didn’t realize was that Luna was capable of falling to zero in a matter of days and that this would catalyze a credit crunch in the industry, which would put significant pressure on all of our illiquid positions.”
Indeed, 3AC’s founders personally got to know Do Kwon in Singapore. They admit that they did not see the fall of this giant becoming “too big, too fast” coming.
Shortly after the LUNA episode, the ecosystem had to overcome the loss of stETH’s foothold on ETH. Faced with margin calls and illiquid positions, players like Celsius were forced to sell their stETH at a loss, exacerbating the situation by increasing the pressure on 3AC.
Despite this, lenders remained comfortable with the fund’s financial situation, according to Su Zhu. As such, they were able to continue borrowing from investors and other liquidity providers until the last big leg down in Bitcoin (BTC) below $20,000:
“You know, I just think that, throughout that period, we continued to work as if nothing had happened. But yeah, after that day, when […] Bitcoin went from $30,000 to $20,000 […] it was extremely painful for us. And that was it, it ended up being kind of a nail in the coffin.”
The GBTC problem
Another factor in the illiquidity of 3AC’s positions lies in a Grayscale product: the Grayscale Bitcoin Trust (GBTC). Before the advent of Bitcoin ETFs, GBTC was one of the only regulated products in the U.S. to trade the asset. Its popularity led it to trade at a premium to BTC.
Grayscale then allowed institutional investors to provide it with BTC in exchange for GBTC, thus generating more value for the lenders. As a result, 3AC became the largest holder of GBTC with a position of over $1 billion.
This operation, due to the price delta between the underlying and the derivative, was supposed to ensure a profit for the investment fund. However, the counterpart of this operation was that the GBTC was to be blocked for six months. As many wanted to take advantage of the arbitrage opportunity, the price spread reversed, causing large losses to Three Arrows Capital, which suffered from locked-in positions.
In the face of this cascade of problems and threats, the founders feel it is in their best interest to keep a low profile for the time being. At the same time, they say the focus is on the recovery process before considering anything else going forward.