[News Overview] The Meteoric Rise and Dramatic Crash of Three Arrows Capital

Three Arrows Capital (3AC) — this keyword has been buzzing around the crypto market for over a month now; it is like an annoying itch that never goes away. Even if you do not actively seek to read or hear about it, you would still have at least seen or heard the mention of it. Someone dabbling in crypto as a hobby even asked me “I keep seeing Three Arrows Capital everywhere suddenly. What’s that about?” So, what is it? Why is it all over the news and hanging constantly on peoples’ lips? Should you be concerned? Let me walk you through these questions and more!

3AC’s Logo for your reference or to jot your memory

First and foremost, 3AC was a Singapore-based cryptocurrency hedge fund founded by Kyle Davies and Zhu Su in 2012, and once even managed about $10 billion in cryptocurrency assets. 3AC was one of the most prominent crypto hedge funds in the world, although by no means Wall Street standards but still in the major leagues. At this point, you are probably thinking, “So? There are so many companies like them out there, what makes them so special? And they have been around for a decade, so why are they popping up everywhere suddenly?” Read on; patience is a virtue alright.

In order to get to the gist of the story, you need a little background so let me give you a quick fill-in. These two ex-high school classmates started 3AC with their living room as their first office — much like how Steve Jobs and his friend set up shop in his parents’ garage and began working on the prototype of Apple I. 3AC’s focus on crypto actually started in 2017 and it only became almost exclusively a crypto-focused firm a year later.

3AC’s portfolio is so impressive that you might just inevitably kowtow when you see it; they started investing in crypto companies, equity rounds, DeFi, gaming, NFTs, and more. With that mammoth of a resume, I would swagger around like Elon Musk (the richest man on Earth so far), almost anyway. Then again, you might say, “Cool. But there are also other behemoth companies out there with an equally, or if not more impressive portfolio.” Well, to that I only have a word or rather, a sound to make, “pfftttt!” 3AC was not just a rising star; they had already made a well-known name for themselves in the crypto industry. That made what happened to them next a truly head-scratching and confusing conundrum.

3AC’s very impressive-looking portfolio that can be found on their website

Like all things in life — big or small — one wrong decision, one bad call, one misplaced bet, can sink even the biggest, sturdiest of ships. For 3AC, Terra was just one of the many miscalculations. If you have not heard of the TerraLuna and TerraUSD (UST) crash, you seriously need to evaluate your life. If you know of it or have heard the mention of it, then thank you. Refer to https://www.coinlive.com/news/detail/?id=8389 where I talked a bit about the crash of UST and LUNA.

3AC bought almost $560m worth of LUNA, but it is now worth $670 due to the spiralling of UST which led to the collapse in LUNA’s value

Referencing Murphy’s law that “anything that can go wrong, will go wrong”, it was only the beginning of the end for them. They were also the largest holder of Grayscale Bitcoin Trust’s (GBTC) shares, a financial vehicle that enables investors to trade shares in trusts holding large pools of Bitcoin. From the start of 2021, the GBTC’s price fell from premium to discount, and the discount just got larger and larger. In short, you can see how that had a negative impact on 3AC financially. 3AC also invested in ETH on Lido, attempting to generate income through ‘stacking’. Basically, ETH needs to be pledged in blockchain in order to earn that sweet yield of 4-5% p.a. The longer you lock, the more interest you earn. So, when the depositors’ ETH is locked, they will get a token called ‘stETH’ 1-for-1, as a proof of staked ETH. Here’s the deal, while you are earning the sweet yield, you cannot swap your stETH back to ETH freely, that only happens when Ethereum 2.0 finally merges.

Originally the idea of stETH was only a prove token, but thanks to some genius DeFi platform (AAVE in this case), you can now stake ‘staked ETH’ and loan more ETH. Repeat the whole process again and again and boom! 3AC became filthy rich and their balance sheet at the same time grew tremendously thanks to this cheat code. When LUNA crashed, it dragged down the price of all cryptocurrencies and 3AC was one of the many traders who rushed to withdraw funds to save its collateral, also driving stETH down further and further. From the below tweet, they looked like the biggest stETH dumper.

3AC’s troubles were brewing quite obviously; a tweet by user Moon on 14 June 2022

By then, they had been hit left, right, and centre, and cracks were everywhere. On 30 June 2022, the Monetary Authority of Singapore (MAS) condemned 3AC for providing false or misleading information and breaching an asset under management threshold. Prior to that day, many reports stated that 3AC had failed to meet multiple margin calls, failed to repay loans, was ordered to be liquidated, and so on. Finally, according to a court filing on 1 July 2022, 3AC filed for Chapter 15 bankruptcy in a federal bankruptcy court in the Southern District of New York, hoping to shield its U.S. assets after being ordered to be liquidated. To date, 3AC owes $3.5 billion to 27 different companies according to court documents, kid you not, Zhu Su is also one of the creditors.

Zhu Su’s last tweet on 12 July 2022 and Kyle’s suspended account on Twitter

3AC’s website is still operational, and they are still hiring at the time of writing. Any takers?

The whereabouts of the two founders were unknown for about five weeks with only Zhu Su stepping out once in the form of the tweet on 12 July. Just as everyone thought they had vanished into thin air, they resurfaced in an interview with Bloomberg just last Friday. They admitted that overconfidence due to the bull market led to multiple bad choices. In addition, Zhu Su stated that their closeness to Terra Founder Do Kwon made them overlook certain red flags. But when Bitcoin fell below $20,000, it was the nail in the coffin. The founders went underground due to a series of death threats and only mentioned they were moving to Dubai.

A tweet on 23 July summarised the insights of the Bloomberg interview

In the world of crypto, there is nothing that stays on top forever. Case in point, 3AC. They went belly-up after riding on some pretty high waves. All in all, they may be nowhere to be found but this case will take ages to subside, especially with so many companies being affected thanks to them. Now, you are slightly better equipped with the foundational knowledge of 3AC in order to impress your non-crypto friends, or jump into a conversation with your crypto-savvy buddies! And the matter of whether you should be concerned or not, at least take away something from them: nothing is too big to fail and whatever you do — good or bad — has consequences, for yourself and others around you. Did 3AC really just make bad choices one after another, are those ‘bets’ calculated, or is there more than meets the eye? I will leave that up to you.

Written by: [Coinlive] Catherine