The two co-founders of the recently bankrupt crypto hedge fund Three Arrows Capital (3AC), Su Zhu and Kyle Davies, decided to break their silence in an interview with Bloomberg.
Zhu and Davies explained that 3AC’s rapid collapse happened due to over-optimistic speculations on their part, , knowing that it now owes $2.3B to creditors.
Zhu mentioned that their strategy was developed for a kind of market that didn’t end up happening.
Davies added, “We believed in everything to the fullest.”
During the interview, Zhu said it was not a surprise that 3AC filed for bankruptcy, along with Celsius and Voyager, for they weren’t the only ones to suffer from the crypto winter.
In fact, lenders like Vauld and BlockFi have been having liquidity issues, and other giants including, Coinbase, Gemini, OpenSea, and Blockchain.com have been sticking to mass layoffs as a strategy to cut down on costs.
Zhu said, “We have our own capital, we have our own balance sheet, but then we also take in deposits from these lenders and then we generate yield on them. So, if we’re in the business of taking in deposits and then generating yield, then that, you know, means we end up doing similar trades.”
Why the silence?
Su Zhu mentioned that the reason why 3AC’s founders have remained virtually silent for the last five weeks was not because they were fleeing with capital, but because they felt their lives were threatened.
“For Kyle and I, there’s so many crazy people in crypto that kind of made death threats or all this kind of noise. We feel that it’s just the interest for everyone if we can be physically secured and keep a low profile”, Zhu explained.
However, last Tuesday, Zhu broke his silence on Twitter when he posted screenshots of a recent email from Advocatus Legal LLP, the firm hired by 3AC, that was sent to legal representatives of the firm’s liquidators, Teneo.
In the letter, 3AC’s lawyers asked the liquidators at Teneo whether they mentioned in their July 8 filing to the U.S. Bankruptcy Court the “threats of physical violence” that the 3AC founders and their families were receiving.
So 3AC may be hiding from disgruntled investors, but they’re no longer hiding from the public.
There is no doubt that this is the end of the road for the hedge fund; for now, though, the pair are focused on meeting their obligations to creditors, and eventually, moving to Dubai, most likely due to its crypto-friendly regulatory approach.
The founders declined to say where they were, but one of the lawyers on the call said their ultimate destination is the United Arab Emirates (UAE).
“Given that we had planned to move the business to Dubai, we have to go there soon to assess whether we move there as originally planned or if the future holds something different for us,” Zhu added.
Reasons of the collapse
Su Zhu and Kyle Davies made it clear that 3AC’s collapse was due to its over-exposure to Terra, staked Ethereum, and Grayscale’s Bitcoin trust.
“What we failed to realize was that Luna was capable of falling to effective zero in a matter of days and that this would catalyze a credit squeeze across the industry that would put significant pressure on all of our illiquid positions”, commented Zhu on the case of Terra, as he initially didn’t see any red flags.
He continued, “We began to know Do Kwon on a personal basis as he moved to Singapore, and we just felt like the project was going to do very big things, and had already done very big things. If we could have seen that, you know, that this was now like, potentially like attackable in some ways, and that it had grown too, you know, too big, too fast.”
Another popular trade among the ailing crypto companies was staked Ethereum, or stETH. Every stETH will in theory be redeemable for one Ethereum after the network migrates to a proof-of-stake (PoS) consensus mechanism in September.
Nonetheless, one of the knock-on effects of Terra’s collapse was that stETH began to miss its peg, which attracted opportunistic traders to bet against the token.
“Because Luna just happened, it was very much a contagion where people were like, ‘OK, are there people who are also leveraged long staked Ether versus Ether who will get liquidated as the market goes down?’ So the whole industry kind of effectively hunted these positions, thinking that, you know, that because it could be hunted essentially.”
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 risks of directly holding it. GBTC is currently trading at a 30% discount to BTC.