The Mad Men Behind the Mask of a Crypto Genius, and the Trillions of Dollars Evaporated

Written by: Jen Wieczner

Compilation: Amber, Foresight News

The ship is beautiful: a roughly 500-ton, 171-inch hull of glass and steel as immaculate as Santorini, and a swimming pool with a glass bottom. The ship will be inaugurated in July, when sunset dinners near Sicily and cocktails in the turquoise shallows of the Ibiza coast are the perfect match for the ship. "Her" quasi-captain showed pals photos of the $50 million boat at a party, boasting that it was "bigger than all the richest billionaire yachts in Singapore" and describing how it was being used on a projector screen. Plans to decorate the cabin so they can better display collected NFT artwork.

The $150 million superyacht is the biggest ever sold by veteran shipbuilder Sanlorenzo in Asia, a revelry for the crypto nouveau riche. "This represents the beginning of a fascinating journey," the yacht broker said in last year's auction announcement, adding that he "looks forward to witnessing many happy moments on board." Cultural and interesting enough name - Much Wow.

Her buyers, Su Zhu and Kyle Davies, are Andover University graduates who run a Singapore-based crypto hedge fund called Three Arrows Capital. But they couldn't wait for the moment to pop the champagne on the bow of Much Wow. Instead, in July of this year, the same month the boat was due to be launched, the pair filed for bankruptcy and disappeared before paying the final payment, "abandoning" the boat in her La Spezzi off the coast of Italy. Asia's berth. Although she has not yet been officially listed for resale, the luxury yacht has already been spotted in the circles of international superyacht dealers.

Since then, the yacht has been the subject of endless memes and after-dinner conversations on Twitter. From millions of small-scale cryptocurrency holders to industry practitioners and investors, almost everyone in the world has witnessed Three Arrows Capital - what may have been a booming global business - in a state of shock or dismay. The downfall of one of the most admired investment funds in finance. The company's thunderstorm triggered a series of impacts, not only forcing Bitcoin to be sold at a historical level, but also "destroying" a lot of "achievement" in the encryption industry over the past two years.

Several crypto companies in New York and Singapore were direct victims of the Three Arrows Capital storm. Voyager Digital, a New York-based publicly traded cryptocurrency exchange once valued in the billions, filed for bankruptcy protection in July, disclosing that Three Arrows Capital owed it more than $650 million. Genesis Global Trading provided a $2.3 billion loan to Three Arrows Capital. Blockchain.com, an early-stage cryptocurrency company that provided digital wallets and grew into a major exchange, has laid off a quarter of its workforce as of press time, with $270 million in loans from 3AC outstanding.

Three Arrows Capital is widely held by the crypto industry's brightest observers to be largely responsible for the 2022 crypto crash, as market chaos and forced sell-offs send Bitcoin and other digital assets down 70% or more by more than 10,000 The value of billions of dollars evaporated. “It’s estimated that 80% of this plunge is due to the 3AC thunderstorm,” said FTX CEO Sam Bankman-Fried, who may be more responsible than anyone for bailing out several bankrupt lenders in the past. Understand the problems. "It's not that 3AC has problems, it's just that they've done it bigger than anyone else. And because of that, they've gained more trust in the entire crypto ecosystem, which ultimately led to more serious consequences. "

For a company that has always portrayed itself as only playing with its own money — “We don’t have any outside investors,” 3AC’s CEO Su Zhu said in an interview with Bloomberg in February this year — but the story came to an abrupt end. , Three Arrows Capital's destructive power is amazing. As of mid-July, the amount of bond claims made by creditors has exceeded 2.8 billion US dollars, and this figure should not be the whole of the iceberg. From the most prominent money lenders to those wealthy investors, everyone in the crypto space seems to have lent their digital currency to 3AC, even 3AC's own employees, who also deposit their salaries on its self-operated platform in exchange for interest. “A lot of people were disappointed, some of them were embarrassed,” said Alex Svanevik, CEO of blockchain analytics firm Nansen. "They shouldn't be doing it because a lot of people's lives could be ruined by it, and a lot of people are giving them money."

That money now appears to have disappeared, along with the assets of several affiliated funds and some funding for various crypto projects managed by 3AC. The true scale of the losses may never be known, and for the many crypto startups that have parked their funds with the firm, publicly disclosing the relationship could risk heightened scrutiny from investors and government regulators. (For this reason, and the legal complexities of being a creditor, many of those who spoke about their experiences with 3AC requested anonymity.)

Meanwhile, the unclaimed yacht appears to be a slightly absurd embodiment of the arrogance, greed and recklessness of the company's 35-year-old co-founder. Su Zhu and Davies are currently in hiding as their hedge fund is in the midst of a chaotic liquidation process. (Multiple emails to them and their attorneys seeking comment went unanswered, save for an automated reply from Davies that read, "Please note I am out of the office at this time.") For an industry that constantly defends itself , Cryptocurrency practitioners have been working hard to prove that this is not a scam from the first day of entering the industry, but Three Arrows Capital seems to have proved the point of view of the "opposite debater" on its own.

Su Zhu and Davies, two ambitious young men who are very smart and understand the structural opportunities of digital currencies: cryptocurrency is a game of creating virtual wealth out of thin air and convincing others with traditional forms of money, they insist that those Virtual wealth should become real world wealth. They build social media credibility by impersonating billionaire financial geniuses, turning it into actual financial credit, and then borrowing billions of dollars for speculative investments, which they can help through their massively influential platforms. push successfully. Before you know it, the pretend billionaire has grown into a real billionaire with the money to buy a superyacht. They groped their way, but always seemed to get their plans to work out perfectly, until the sudden end came.

In 2005, Su Zhu and Davies were seniors at Andover University. Source: Phillips Academy

Su Zhu and Kyle Davies met at Phillips Academy in Andover, Massachusetts. While many Andover children are known to come from great wealth or prominent families, Su Zhu and Davies grew up in relatively modest surroundings in suburban Boston. “Our parents were not wealthy,” Davies said in an interview last year. "We're very middle-class people." They weren't particularly popular, either. “They were all called weirdos, especially Su,” said a classmate. "Actually, they're not weird at all - just shy."

Su Zhu, a Chinese immigrant who came to the U.S. with his family when he was 6 years old, is known for his flawless GPA and heroic AP courses; He won a special prize for his work on mathematics, but he was more than just a numbers whiz — he also graduated with Andover's top prize for fiction. “Su was the smartest guy in our class,” recalls a classmate.

Davies was also a star on campus, but his classmates viewed him as an outsider in other ways—if they remembered him. A budding Japanese, Davies graduated with highest honors in Japanese. According to Davies, he and Su Zhu were not particularly close at the time. “We went to high school together, we went to college together, we got our first jobs together. We were never the best of friends,” he said on the Crypto 2021 podcast. “I didn’t know him very well in high school. I knew he was a Smart guy — he was like the valedictorian of our class — but in college, we had more conversations.”

"Going to college together" was at Columbia University, where they both took math-heavy classes and joined the squash team. Su Zhu graduated a year early with honors, then moved to Tokyo to work in derivatives trading at Credit Suisse, where Davies interned with him. They sat next to each other's desks until Su Zhu was fired during the financial crisis and then joined Flow Traders, a high-frequency trading platform in Singapore.

There, Su Zhu learned the art of arbitrage — trying to capture small changes in the relative value between two related assets, usually by selling an overpriced asset and buying an underpriced one. He focused on exchange-traded funds (essentially mutual funds that are listed like stocks), buying and selling related funds for a small profit. He excels in this area, earning a top spot in Flow's earnings rankings. This success gave him new confidence. He has been known to be outspoken in his criticism of the performance of colleagues and even his boss. Su Zhu stood out in another way: Flow's office was full of servers, it was hot, he would come to work in shorts and a T-shirt, then take off his shirt, even walking through the building's lobby without getting fully dressed. “Su would walk around shirtless in his mini shorts,” recalls a former colleague. "He's the only one who trades off his shirt."

After Flow, Su Zhu spent a stint at Deutsche Bank, following in the footsteps of crypto legend and billionaire co-founder of BitMEX exchange Arthur Hayes. Davies stayed at Credit Suisse, but by then both were tired of life at the big banks. Su Zhu complained to acquaintances about the low quality of his bank colleagues, allowing people to lose the company's money in transactions with little consequence. In his view, the best minds have left hedge funds, or are left to fend for themselves. He and Davies, now 24, decided to start their own platform. "There's almost no harm in leaving," Davies explained in an interview last year. "Like, if we left and really screwed up, we'd definitely get another job."

Living temporarily in San Francisco in 2012, Su Zhu and Davies pooled their savings and borrowed money from their parents to raise about $1 million in seed funding for Three Arrows Capital. The name comes from a Japanese legend in which a prominent daimyo or warlord taught his sons to distinguish between trying to break one arrow - effortlessly - and trying to break three arrows together - impossible.

They doubled their money in less than two months, Davies said on the podcast UpOnly. The pair soon traveled to Singapore, which has no capital gains tax, and by 2013 they had registered the fund there, planning to give up their US passports and become citizens. Fluent in both Chinese and English, Mr Su Zhu is well-versed in Singaporean social circles, hosting occasional poker games and friendlies with Davies. Still, they seem frustrated with not being able to take Three Arrows Capital to the next level. At a dinner party around 2015, Davies lamented to another trader how difficult it was to raise money from investors. Traders weren't surprised -- after all, Su Zhu and Davies don't have much pedigree or track record.

At this early stage, Three Arrows Capital focused on a niche market: arbitrage emerging market foreign exchange (or "FX") derivatives -- financial products pegged to the future price of a smaller currency (such as the Thai baht or Indonesian rupiah). BitMEX's Hayes wrote in a recent Medium post that access to these markets, which depend on having strong trade relationships with big banks, is "nearly impossible." “When Su and Kyle told me how they got started, I was impressed by their haste to get into this lucrative market.”

At the time, foreign exchange trading was moving to electronic platforms, and it was easy to spot differences or spreads between quotes from different banks. Three Arrows Capital has found its sweet spot trolling for price errors and "picking them," as Wall Street calls them, often earning pennies on every dollar traded. It's a tactic that banks loathe -- Su Zhu and Davies are basically grabbing money that the institutions would otherwise keep. Sometimes, when banks realize they've misquoted Three Arrows Capital's price, they'll ask to amend or cancel the deal, but Su Zhu and Davies won't back down. Last year, Su Zhu tweeted a photo of himself sitting in front of 11 screens smiling in 2012. He seemed to refer to their forex trading strategy of picking quotes from banks, writing, “Until you You survived by beating five traders with the same quote at 2:30."

By 2017, banks began trying to prevent this arbitrage operation. “Whenever Three Arrows Capital asked for a quote, all the bank FX traders were like, ‘Fuck these guys, I’m not going to price them,’” said a former trader who was a 3AC counterparty. Lately, there has been a running joke among forex traders that they knew about Three Arrows Capital very early on and now watch it fail with a bit of schadenfreude. "We the forex traders are partly responsible for this because we know these people can't make money in forex," the former trader said. "But when they came to crypto, everyone thought they were geniuses."

On May 5, 2021, as Three Arrows Capital's wealth peaked, Su Zhu tweeted a photo of the firm's early days in 2012, when he and Davies were doing deals in a two-bedroom apartment. There was an implicit message in the tweet: think how good it would be for us to build a multi-billion dollar company from such humble beginnings. Source: Su Zhu Twitter

One of the basic things to understand about cryptocurrency is that, by any means, it has been in the course of extreme but roughly regular boom and bust cycles so far. The 2018 bear market has been particularly painful in Bitcoin's 13-year history. After reaching an all-time high of $20,000 in late 2017, the cryptocurrency fell to $3,000, with thousands of smaller coins appearing on the market. It was against this backdrop that Three Arrows Capital turned its attention to cryptocurrencies, investing at such an opportune time that Su Zhu is often considered a genius (that is, he takes credit) for He accurately judged the bottom of that cycle. In later years, to the many impressionable crypto newbies — and even industry insiders — who followed Su Zhu and Davies on Twitter, it looked like brilliant talent. But in fact, the grasp of the timing that time may really be just good luck.

The company's experience in arbitrage came in immediately as cryptocurrencies were traded on exchanges around the world. One well-known trading strategy is known as “kimchee premium” — it involves buying bitcoin in the U.S. or China and selling it at a higher price in South Korea, where exchanges are more regulated, leading to higher prices . Back then, winning trade setups like this were plentiful and profitable. They are the bread and butter of Three Arrows Capital, which tells investors it operates a low-risk strategy designed to make money in both bull and bear markets.

Another type of crypto arbitrage could involve buying bitcoin at the current (or "spot") price while simultaneously selling bitcoin futures, or vice versa, to capture a price premium. "The fund's investment objective is to achieve consistent market-neutral returns while preserving capital," reads 3AC's official filing. Of course, investing with limited downside no matter what the broader market is doing is called "hedging" (hedge funds get their name). But hedging strategies tend to shed the most money when executed at scale, so Three Arrows Capital began borrowing money and putting it to work. If all goes well, it could generate profits that exceed the interest it owes on loans. Then it would do it all over again, continuing to expand its investment pool, which would allow it to borrow larger amounts.

In addition to borrowing heavily, the company's growth strategy rests on another plan: building a massive social media presence for the two founders. In the crypto space, the only social media platform that matters is Twitter. Many key figures in what has become a global industry have anonymous or pseudo-anonymous Twitter accounts with goofy cartoon avatars. In an unregulated space without traditional institutions and global markets disappearing 24/7 non-stop trading, Crypto Twitter is the center of the arena, a clearinghouse for market-moving news and opinions.

Su Zhu has earned his way into the upper echelons of crypto Twitter. According to friends, Su Zhu has a definite plan to become a "Twitter celebrity": It needs to tweet a lot, cater to the crypto masses with extremely optimistic forecasts, attract a large following, and then become a top predator on Crypto Twitter, to Profit at the expense of everyone else.

Su Zhu gained 570,000 followers by promoting his theory of a cryptocurrency “super cycle” — the idea of a multi-year bull run in bitcoin prices that rallied into the millions of dollars per coin. “As the crypto super cycle continues, there will be more and more people trying to understand how far ahead they are,” Su Zhu tweeted last year. “The only thing that matters is how many coins you have now.” and: “As the super cycle continues, the mainstream media will try to talk about how the early whales had it all. The richest people in crypto now have a net worth close to zero in 2019. I know people who ironically say that if someone lent them an extra $50,000 in the past, they would have an extra $500,000,000 now." Su Zhu keeps emphasizing this on the platform and in crypto podcasts and video shows: buy , buy, buy now, the super cycle will drive you crazy one day.

“They used to brag that they could borrow as much as they wanted,” said a former trader who knew them in Singapore. "It's all planned, man, from the way they build their credibility to the way the fund is structured."

As it has grown, Three Arrows Capital has branched out from Bitcoin to a range of startup crypto projects and more obscure cryptocurrencies (sometimes called "shitcoins"). The company seems to be pretty indiscriminate with these bets, almost as if it's treating them like a charity. Earlier this year, Davies tweeted: “It doesn’t really matter what VCs invest in, more fiat money in the system is good for the industry.”

Many investors remember the first time they sensed that something might be wrong with Three Arrows Capital was in 2019. That year, the fund began reaching out to industry peers, calling it a rare opportunity. 3AC invested in a crypto options exchange called Deribit and sold a stake; the term sheet values Deribit at $700 million. But some investors noticed that the valuation seemed off — and found it was only worth $280 million. It turns out that Three Arrows Capital was attempting to sell some of its investments at a steep markup, essentially generating huge kickbacks for the fund. It's a sketchy thing to do in venture capital, and it blindfolded outside investors as well as Deribit itself.

But the company is thriving. The cryptocurrency market has rallied for months amid the pandemic as the Federal Reserve pumped money into the economy. By the end of 2020, Bitcoin had quintupled from its March lows. To many, it does look like a super cycle is starting. According to its annual report, Three Arrows Capital's main fund returned more than 5,900%. By the end of that year, it managed more than $2.6 billion in assets and $1.9 billion in liabilities.

One of 3AC’s largest positions — and a key one in its fortunes — is in a form of bitcoin traded on the stock exchange called GBTC (short for Grayscale Bitcoin Trust). The company moved away from the old routine of making profits through arbitrage, amassing as much as $2 billion in GBTC. At the time, it was trading at a premium to regular bitcoin, and 3AC was happy to pocket the difference. On Twitter, Su Zhu has often spoken bullishly about GBTC, and has repeatedly observed that buying it is "shrewd" or "smart."

The public personas of Su Zhu and Davies have grown more extreme; their tweets have grown more flamboyant, and social acquaintances say they have made no secret of their condescension to friends from the past and less wealthy contemporaries. “They don’t have much empathy for most people, especially ordinary civilians,” said a former friend.

Three Arrows Capital is known for high staff turnover, especially among traders who complain that they are never recognized for winning deals, but insulted as stupid when they screw up - even with their salaries garnished , bonuses have also been reduced. (Though, 3AC traders are highly sought after in the industry; Steve Cohen's hedge fund, Point72, was interviewing a team of 3AC traders before the fund collapsed in order to surreptitiously poach members of its trading team.)

Su Zhu and Davies kept the company's inner workings confidential. Only the two of them can move funds between certain crypto wallets, and most Three Arrows Capital employees have no idea how much money the company manages. While employees complained about the long hours, Su Zhu was reluctant to hire new people, fearing they would "disclose commercial secrets," the friend said. In Su Zhu's view, Three Arrows Capital is helping anyone who works for it. “Su said they should be paid for providing valuable learning opportunities for employees,” the friend added. Some business acquaintances in Singapore describe the 3AC founder as a cosplayer of the Wolf of Wall Street trading floor in the 1980s.

The pair, both now married fathers with young children, have become exercise fanatics, exercising as many as six times a week and following calorie-restricted diets. Su Zhu reduced his body fat to around 11 percent and tweeted an "update" of his shirtless appearance. A friend recalls calling his personal trainer "fat" on at least one occasion. When asked about his drive to become a "big guy," Su Zhu told an interviewer, "I was very weak most of my life. After COVID, I found a personal trainer. I have two Kids, so it’s like waking up, playing with your kids, going to work, going to the gym, coming home, putting them to sleep.”

While not billionaires yet, Su Zhu and Davies are starting to enjoy some of the luxuries of the super rich. In September 2020, Su Zhu purchased a $20 million mansion in the name of his wife, which is known as a "superior bungalow" in Singapore. The following year, he bought another property in his daughter's name for $35 million. (It is revealed that Davies also bought a mansion after becoming a Singapore citizen, but the house is still under renovation and he has not moved in yet.)

But from a human point of view, Su Zhu is still an introvert who doesn't like small talk. Davies is an outspoken voice in the company's business dealings and social engagements. Some acquaintances who met the pair on Twitter for the first time found them surprisingly low-key in person. "He's very dismissive of a lot of mainstream, popular stuff," says a friend of Davies'. When he became wealthy, Davies went out of his way to purchase and customize a Toyota Century, a simple-looking car that cost about the same as a Lamborghini. "He'll be proud of it," said another friend.

While Su Zhu and Davies got used to their new wealth, Three Arrows Capital remained a huge funnel for borrowed money. A lending boom has hit the crypto industry as DeFi (short for "decentralized finance") projects offer savers far higher rates than traditional banks can offer. Three Arrows Capital will take custody of cryptocurrencies belonging to employees, friends and other wealthy individuals through its platform. When lenders asked Three Arrows Capital for collateral, it was often rejected. Instead, it offered to pay a rate of 10% or more, higher than any competitor was offering. As one trader put it, some lenders don’t ask for audited financial statements or any documentation at all because of their “gold standard” reputation. Even though it is large and well-capitalized,

For other investors, Three Arrows Capital's need for cash is another warning sign. In early 2021, a fund called Warbler Capital, run by a 29-year-old Chicago native, was trying to raise $20 million for a strategy that largely involved outsourcing its capital to 3AC. Matt Walsh, co-founder of cryptocurrency-focused Castle Island Ventures, can't fathom why a multi-billion-dollar foundation like Three Arrows Capital bothers to commit such a small amount of money. "I sat there scratching my head," recalls Walsh. "It's starting to ring alarm bells. Maybe these institutions are already insolvent."

The trouble seems to have started last year, and Three Arrows Capital's huge bet on GBTC is the crux of the matter. Just as the company was rewarded at a premium, it suffered when GBTC started trading at a discount to Bitcoin. GBTC's premium is a result of the product's original uniqueness - it's a way to own Bitcoin in your eTrade account without having to deal with cryptocurrency exchanges and esoteric wallets. As more people flooded into the industry and new alternatives emerged, that premium disappeared -- and then turned negative. But many smart market players have seen it through. “All arbitrage disappears after a point,” said a trader and former colleague of Su Zhu.

Davies is aware of the risk this poses to Three Arrows Capital, admitting in a September 2020 episode of the podcast produced by Castle Island that he expects to lose money on this part of the deal. But before the show aired, Davies requested that the segment be removed. Three Arrows Capital's GBTC shares were locked up for six months at a time -- although Su Zhu and Davies had a chance to exit sometime that fall, they didn't.

"They had ample opportunity to escape," Fauchier said. “I don’t think they’d be stupid enough to do it with their own money. I don’t know what’s got their minds on it. It’s obviously one of those deals where you want to be the first in and you don’t want to be the last One exit.” Colleagues now say Three Arrows Capital is hanging on to its GBTC position as it bets the SEC will approve GBTC’s long-awaited switch to an exchange-traded fund, making it more liquid and tradable stability, and potentially eliminate bitcoin price mismatches. (In June, the SEC rejected GBTC's application.)

By the spring of 2021, GBTC had fallen below the price of Bitcoin, and Three Arrows Capital was hit hard as a result. Still, cryptocurrencies endured a bull run that lasted into April, with Bitcoin hitting a record above $60,000 and Dogecoin surging on an irrational rally fueled by Elon Musk. Su Zhu was also bullish on Dogecoin, with 3AC reported to have around $10 billion in assets at the time, citing Nansen as saying (although Nansen’s CEO has now clarified that most of the amount may have been borrowed).

In retrospect, Three Arrows Capital seems to have suffered a fatal loss later that summer—if a human loss, not a financial one. In August, two of the fund's minority partners, who are based in Hong Kong and work 80 to 100 hours a week, managed most of 3AC's business, retired at the same time. That leaves much of their work to Davies, Three Arrows Capital's chief risk officer, who appears to be taking a more leisurely approach to finding headwinds for the company. “I think they used to manage risk much better,” said the former friend.

Around that time, there were signs that Three Arrows Capital was facing a cash crunch. When lenders ask for collateral for the fund's margin trades, it typically pledges its stake in private company Deribit, rather than an easy-to-sell asset like bitcoin. Such illiquid assets are not ideal collateral. But there was another hurdle: Three Arrows Capital co-owns shares of Deribit with other investors who have refused to sign an agreement to use their shares as collateral. Apparently, 3AC is trying to pledge assets it doesn't have rights to - and trying to do so repeatedly, offering the same stake to various institutions, especially after Bitcoin starts to drop in late 2021. The company appears to have committed the same locked block of GBTC to several lenders as well. “We suspect Three Arrows Capital is attempting to pledge some collateral to multiple people at the same time,” said FTX CEO Bankman-Fried. “I would be very surprised if that was all the misrepresentation here; Coincidence. I strongly suspect they make more."

Bear markets in cryptocurrencies tend to dwarf any volatility in traditional financial markets. The crash was so severe that insiders called it a "crypto winter," and this bear market can last for years. This is the situation Three Arrows Capital found itself in in mid-January 2022, they couldn't stand it anymore, GBTC's position was eating a bigger and bigger hole in 3AC's balance sheet, and most of its funds were taken away. Bundled in restricted stock of smaller crypto projects. Other arbitrage opportunities have dried up. In response, Three Arrows Capital appears to have decided to increase the riskiness of its investments in the hopes of scoring high marks and getting the company back on its feet. "What made them change was just the pursuit of returns," said a major lending executive. "They might say, 'What if we go long?'"

In February, Three Arrows made its biggest move yet: It poured $200 million into a hit token called Luna, created by a brash, charming South Korean developer and Stanford dropout named Do Founded by Kwon.

Around the same time, Su Zhu and Davies were planning to abandon Singapore. They have already moved part of the fund's legal infrastructure to the British Virgin Islands, and in April, Three Arrows Capital announced it would be moving its headquarters to Dubai. That same month, Su Zhu and Davies bought two villas, one on Dubai's Crystal Lagoon in District 1, a man-made sea bigger than anywhere else in the world, for a total of about $30 million, friends said. Sapphire Oasis. Showing photos of the side-by-side mansions, Su Zhu told friends he had purchased his new seven-bedroom property — a 17,000-square-foot compound — from the consul.

But in early May, Luna suddenly plummeted to near-zero levels, wiping out more than $40 billion in market value in a matter of days. Its value is pegged to a related stablecoin called terraUSD. When terraUSD failed to maintain its peg to the U.S. dollar, both currencies collapsed. According to Herbert Sim, a Singaporean investor who tracked 3AC’s wallet, Three Arrows Capital’s stake in Luna used to be about $5 billion, and this huge sum “disappeared out of thin air” almost overnight, followed by a death spiral of the expansion.

Scott Odell, director of lending at Blockchain.com, contacted the company to understand the scale of the impact. After all, the loan agreement states that Three Arrows Capital will notify the company if its overall drawdown rate reaches at least 4%. “Anyway, it’s not that big as part of a portfolio,” wrote Edward Zhao, 3AC’s top trader, according to a public release on Blockchain.com. A few hours later, Odell sent a notice that a significant portion of its $270 million loan would need to be recovered and would be paid in U.S. dollars or stablecoins. This caught them off guard.

The next day, Odell contacted Davies directly, who succinctly assured him that everything was fine. He sent Blockchain.com a simple one-sentence letter without a watermark, claiming that the company manages $2.387 billion. Meanwhile, Three Arrows Capital is making similar representations to at least six lenders. According to an affidavit included in the 1,157-page document released by the 3AC liquidators, Blockchain.com "now doubts the accuracy of this statement of net asset value."

Days later, instead of backing down, Davies threatened to “boycott” Blockchain.com if it called back the 3AC loan. “As soon as that happens, we know something is wrong,” said Lane Kasselman, chief business officer at Blockchain.com.

Inside the Three Arrows Capital offices, the mood has changed.

According to a former employee, Su Zhu and Davies used to hold regular pitches on Zoom, but they stopped showing up that month, and then managers stopped that type of scheduling altogether.

In late May, Su Zhu tweeted what could also be his epitaph: "The supercycle price argument is wrong, sadly." Still, he and Davies acted calmly because they Seemingly calling out every wealthy cryptocurrency investor they knew, asking to borrow large amounts of bitcoin and offering the same high interest rates the company has always been. “They’re clearly promoting themselves as a cryptocurrency hedge fund after they already know they’re in trouble,” said a person close to one of the largest lenders. In reality, the company Three Arrows Capital was looking for funds just to repay other lenders. "It's robbing Peter to pay Paul," Matt Walsh said. In mid-June, a month after Luna’s debacle, Davies told Blockchain.com’s chief strategy officer, Charles McGarraugh, that he was trying to find another lender to avoid liquidating his position.

But in practice, this financial chaos often leads to massive sell-offs by all involved to raise cash to stay solvent. Three Arrows Capital's position was so large that it actually started hitting the broader cryptocurrency market: 3AC itself and other panicked investors were scrambling to sell and meet margin calls, which in turn drove down prices, forming A vicious circle has formed. The drop sparked further declines as lenders demanded more collateral and sold positions when 3AC and others failed to post, sending bitcoin and its peers to multi-year lows. The crash grabbed global headlines as the overall value of the crypto market fell below $1 trillion from a peak of $3 trillion in late 2021. McGarraugh said Davies told him, “If the crypto market continues to fall, 3AC will never stand a chance.” That was the last time anyone at Blockchain.com spoke to Davies. After that, he and Su Zhu stopped answering their lenders, partners and friends.

Rumors that the company was closing down quickly spread on Twitter, further fueling a larger cryptocurrency sell-off. On June 14, President Su Zhu finally acknowledged the problem: “We are communicating with relevant parties and trying our best to resolve this issue,” he tweeted. A few days later, Davies gave an interview to The Wall Street Journal in which he noted that he and Su Zhu remained “cryptocurrency believers,” but admitted that “the Terra-Luna situation caught us off guard.”

Su Zhu started trying to sell at least one of his top properties. At the same time, the company began moving funds. On June 14, the same day Su Zhu tweeted, 3AC sent nearly $32 million in stablecoins to the crypto wallet of an affiliated shell company in the Cayman Islands. "It is unclear where the funds subsequently went," the liquidators wrote in their affidavit. But there is a working theory. In the final days of Three Arrows Capital, partners reached out to every wealthy crypto whale they knew to borrow more bitcoin, while top crypto execs and investors — from the U.S. to the Caribbean to Europe to Singapore - where 3AC is believed to have found a willing lender of last resort Organized crime figures. Owing a lot of money to these characters would explain why Su Zhu and Davies went into hiding. These are also the types of lenders you want done before anyone else, but you may have to move the funds through the Cayman Islands. “They (the money) returned to the mafia,” said the former trader and 3AC business partner, adding, “If you start borrowing money from these people, you must be very desperate.”

In the aftermath of the crash, executives at cryptocurrency exchanges began examining the clues they left behind. They were surprised to find that Three Arrows Capital had no short positions at all, which means that it had stopped hedging - the basis of their investment strategy. "It's easy to do," said the leading lending executive, "without any trading desk knowing you're doing it." Investors and exchange executives now estimate that by the end of the year, 3AC will be leveraged at about 100% of its assets. triple, and some even suspect the figure could be higher.

Three Arrows Capital appears to have put all of the money in commingled accounts -- unbeknownst to the owners of the funds -- and withdrew every tranche to pay back lenders. "They probably managed the whole thing on an Excel sheet," Walsh said. This means that when 3AC ignored margin calls and withheld lenders in mid-June, those lenders, including FTX and Genesis, liquidated their accounts, unaware that they were also selling assets belonging to 3AC's partners and clients.

After the company’s traders stopped responding to messages, lenders tried calling, emailing and messaging them on every platform, even reaching out to their friends and stopping by their homes before liquidating their collateral. Some peered through the doors of 3AC's Singapore office, where weeks of mail had been piling up on the floor. Those who counted Su Zhu and Davies as close friends and lent them money (even $200,000 or more) just a few weeks ago heard nothing about the fund's troubles and were outraged and betray. "They're definitely sociopaths," said a former friend. “The numbers they reported in May were very, very wrong,” Kasselman said. "We strongly believe they committed fraud. There's no other way to say it -- it was fraud, they lied." Genesis Global Trading, which has lent the most to Three Arrows Capital of any lender, has raised $1.2 billion in total. claim. Others lent them billions more, much of it in bitcoin and ethereum. So far, liquidators have only recovered $40 million in assets. “It was clear that they were insolvent but continued to borrow, which looked like a classic Ponzi scheme,” Kasselman said. "The comparison between them and Bernie Madoff isn't that far off."

We also saw something interesting when Three Arrows Capital filed for Chapter 15 bankruptcy in the Southern District of New York on July 1. Even as creditors rush to file claims, 3AC's founders are already there first: At the top of the list are Su Zhu himself, who filed a $5 million claim on June 26, and Davies' wife, Kelly Kaili Chen, She claims she lent nearly $66 million to the fund. But there was little evidence for their claim other than a single number. "It's a total joke," Walsh said. While insiders were unaware of Chen's involvement with the company, they assumed she must have been acting on behalf of Davies; her name appeared on various corporate entities, possibly for tax reasons. Su Zhu's mother and Davies' mother also filed claims, according to people familiar with the matter. (Su Zhu later told Bloomberg, “You know, they will say that I absconded funds in the last period, when I actually invested more of my personal funds.”)

Since the company filed for bankruptcy, liquidators hadn't been in touch with Su Zhu and Davies until press time, and their whereabouts are still unknown, according to people familiar with the matter. The co-founders have received death threats, their lawyers said. During an awkward Zoom conference call on July 8, participants using the usernames of Su Zhu and Davies logged in with their cameras turned off, even as the pair of BVI liquidators posed dozens of questions to their avatars. Problem, they also refuse to unmute.

Regulators are also taking a closer look at Three Arrows Capital. The Monetary Authority of Singapore - the country's equivalent of the US Securities and Exchange Commission - is investigating whether 3AC has "seriously breached" its regulations, and the agency has already been sanctioned for providing "false or misleading" information.

On July 21, Su Zhu and Davies were interviewed by Bloomberg "from an undisclosed location." The interview was unusual for several reasons — Su Zhu protested headlines about his free-spending lifestyle by cycling to work, avoiding nightclubs, and “only having two homes in Singapore” — and with partner Blame 3AC's debacle on their failure to foresee that the cryptocurrency market could fall. Neither mentioned the word "supercycle," but the attitude was clear. As Davies puts it, "We do very well when the market is good. It's just that we lose the most during bad times."

The pair also told Bloomberg that they planned to travel to Dubai "soon". Their friends said they were already there. The oasis in the desert offers a particular advantage, lawyers say: The country has no extradition treaties with Singapore or the United States.