Three Arrows Capital blew through billions with risky cryptocurrency bets

The now bankrupt Three Arrows Capital (3AC) presented signs of mismanagement before the cryptocurrency hedge fund’s ultimate collapse. A report from New York Magazine reveals that 3AC co-founders Kyle Davies and Su Zhu faced criticism from banks and other traders before the company even entered the crypto market.

In its early days, the Singapore-based 3AC got into foreign exchange (FX) trading and reportedly practiced something called currency arbitrage, which allowed Zhu and Davies to cash in on mispriced quotes from different brokers, even if it resulted in gains of just “fractions of a cent on each dollar traded.” According to New York Magazine, banks would sometimes try to contact 3AC in an attempt to call off or adjust the trade, but the firm would refuse. Banks reportedly began cutting off 3AC by 2017.

“We FX traders are partly to blame for this because we knew for a fact that these guys were not able to make money in FX,” a former trader told New York Magazine. “But then when they came to crypto, everyone thought they were geniuses.”

When 3AC made the transition to trading crypto, it found success applying the same principles of currency arbitrage to the market. But New York Magazine notes that investors started realizing something “might be off” about the company in 2019, when it offered to sell its stake in a crypto options exchange, Deribit, for an inflated price of $700 million. In reality, the value of the investment was reportedly only $289 million, and 3AC was “attempting to flip a portion of its investment at a steep markup, essentially netting the fund an enormous kickback.”

3AC’s co-founders later bragged about the firm’s $2 billion investment in GBTC (Grayscale Bitcoin Trust) — but the firm reportedly took too long to sell its position and watched its gains evaporate. As reported by New York Magazine, Davies admitted that he knew GBTC’s value would eventually fall during a podcast created by venture capital firm Castle Island and later asked that producers cut that part out before the show went live (which they did).

3AC also bet big on Terra and its sister coin Luna, which crashed after slipping from its dollar peg in May. Herbert Sim, a Singapore-based investor who tracked 3AC’s wallets, told New York Magazine that 3AC’s holdings went from around $500 million to just $604 in the aftermath of the collapse. In an interview with The Wall Street Journal, Davies and Zhu admitted that the company lost $200 million in investments but said they’ve “always been crypto believers” and “still are.”

And that’s how we got here. 3AC filed for bankruptcy last month, bringing down crypto broker Voyager Digital along with it. Crypto billionaire and the founder of the FTX exchange, Sam Bankman-Fried, blames 3AC for triggering a ripple effect that caused crypto companies to file for bankruptcy or freeze transactions. “I suspect they might be 80 percent of the total original contagion,” Bankman-Fried said in a statement to New York Magazine. “They weren’t the only people who blew out, but they did it way bigger than anyone else did. And they had way more trust from the ecosystem prior to that.”

3AC’s co-founders are believed to be in hiding, and lenders can’t get ahold of the pair. According to New York Magazine, theories are floating around that the company borrowed money from individuals involved in organized crime and that’s why the co-founders have seemingly vanished without a trace. 3AC reportedly routed $32 million worth of stablecoins through the Cayman Islands, a location the ultra-wealthy often use as an avenue for laundering money due to its lax tax laws.

Last month, Zhu and Davies held an interview with Bloomberg from an “undisclosed location” and told the outlet they planned on going to Dubai, where the US or Singapore doesn’t have any extradition agreements. The pair leave behind a $150 million superyacht — named “Much Wow” in reference to the Doge meme — and $30 million Singaporean mansion that Zhu has already looked into selling.