Until then not very communicative, the founders of the cryptocurrency investment fund Three Arrows Capital (3AC) took the floor. Faced with death threats, Su Zhu and Kyle Davies explain that they have chosen to remain hidden. They then returned to the reasons that led to the collapse of their company, which was one of the benchmarks among blockchain institutions.
The founders of 3AC give their vision of the situation
Since the start of the difficulties of the cryptocurrency investment fund Capital of the Three Arrows (3AC), its founders Su Zhu and Kyle Davies were particularly quiet. The latter gave an interview to Bloomberg to try to explain the reasons for their failure.
After weeks in hiding, the disgraced founders of Three Arrows Capital are finally talking about the spectacular implosion of their once high-flying hedge fund https://t.co/UMHKPMG7D9
—Bloomberg (@business) July 23, 2022
Su Zhu first explains that death threats forced them to stay hidden. However, he insists that he and Kyle Davies have been cooperating from day one with the relevant authorities following the fund’s liquidation. Rumors have also emerged as requested the founders of 3AC would have “left with the cash register”, it seems that it would be quite the opposite:
“People can call us stupid […] or delusions. And, I will accept that. Perhaps. But you know, they will say that I fled with the funds during the last period, when I actually handed over my personal money. »
The two partners have refused to decline where they currently turned outbut according to one of the lawyers present during the call, the United Arab Emirates would be the final destination.
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Terra, the trigger
If the figures vary from one source to another, Three Arrows Capital owes 3.5 billion dollars to its creditors. The current situation stems from an excess of optimism from Su Zhu and Kyle Davies.
The latter have indeed bet on a cryptocurrency supercycle. This caused them to borrow large sums 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 dynamics of the fund:
“What we didn’t realize was that Luna was capable of going to zero within days and that would catalyze a credit cut in the industry, which would put significant pressure on all of our illiquid positions. »
The founders of 3AC have personally meets Do Kwon in Singapore. They admit that they did not see coming the fall of this giant who had become “too big, too fast”.
Shortly after the LUNA episode, the ecosystem had to overcome the loss of stETH’s peg on ETH. Faced with margin calls and the illiquidity of their positions, players like Celsius have been forced to sell their stETH at a lossthus accentuating the situation by increasing the pressure that 3AC was under.
Still, lenders remained comfortable with the fund’s financial situation, according to Su Zhu. So they were able continue to borrow from investors and other liquidity providers, until the last big leg down Bitcoin (BTC) below $20,000:
“You know, I just think that throughout this period, we continued to work as if nothing had happened. But yes, after that day, when […] Bitcoin fell from $30,000 to $20,000 […] it was extremely painful for us. And that was it, it ended up being kind of the nail in the coffin. »
The GBTC problem
Another illiquidity factor in 3AC’s positions is a grayscale product : the Grayscale Bitcoin Trust (GBTC). Before the arrival of Bitcoin ETFs, GBTC was one of the only regulated products in the United States to trade this asset. His popularity led him to trade for a price higher than BTC.
Grayscale then allowed institutions to provide it with BTC in exchange for GBTC, thus generating added value for lenders. This is how 3AC became largest holder of GBTC with a position of over a billion dollars.
This operation, due to the price delta between the underlying and the derivative, should ensure a profit for the investment fund. But the counterpart of this operation is that the GBTC had to be pendant blocked six months. As many wished to take advantage of the arbitrage opportunity, the price gap reversed causing large losses to Three Arrows Capital, which was suffering from locked positions.
Faced with all this cascade of problems and threats, the founders felt that they have every interest in keeping a low profile for the moment. Furthermore, they specify that the emphasis is on the recovery process before considering anything else for the future.
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