3AC Founders Break Silence and Mention 3 Crypto Trades that Led to Bankruptcy

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.