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Three Arrows Capital (3AC) collapse: founders break silence

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The founders of cryptocurrency investment fund Three Arrows Capital (3AC) have spoken out. In the face of death threats, Su Zhu and Kyle Davies explained that they chose to stay hidden. They then went back 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 beginning of the difficulties of the cryptocurrency investment fund Three Arrows Capital (3AC), its founders Su Zhu and Kyle Davies were particularly silent. The latter gave an interview to Bloomberg to try to explain the reasons for their failure.

Su Zhu first explains that death threats forced them to stay hidden. However, he insists that he and Kyle Davies have been cooperating with the relevant authorities since day one following the liquidation of the fund. There were also rumours that the founders of 3AC had “taken the cash”, but it seems that the opposite is true:

People can call us stupid […] or delusional. And, I’ll accept that. And I’ll accept that. Maybe. But you know, they’ll say I ran away with the funds during the last period, when I actually handed over my personal money. “

The two partners refused to reveal their current whereabouts, but according to one of the lawyers present during the call, the United Arab Emirates would be the final destination.

Terra, the trigger

While figures vary from source to source, Three Arrows Capital is owed $3.5 billion by its creditors. The current situation has its origins in excessive optimism on the part of Su Zhu and Kyle Davies.

They bet on a cryptocurrency supercycle. This led them to borrow large sums of money 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.

So the collapse of Terra (LUNA) put a stop to the fund’s momentum:

“What we didn’t realise was that Luna was capable of falling to zero in a matter of days and that this would catalyse a credit crunch in the industry, which would put significant pressure on all our illiquid positions. “

Indeed, the founders of 3AC personally met Do Kwon in Singapore. They admit that they did not see the fall of this giant “too big, too fast” coming.

Shortly after the LUNA episode, the ecosystem had to overcome the loss of stETH’s foothold on ETH. Faced with margin calls and illiquid positions, players such as Celsius were forced to sell their stETH at a loss, thus exacerbating the situation by increasing the pressure on 3AC.

Despite this, lenders remained comfortable with the fund’s financial situation, according to Su Zhu. As such, they were able to continue borrowing from investors and other liquidity providers until the last big leg down in Bitcoin (BTC) below $20,000:

“You know, I just think that, throughout that period, we continued to work as if nothing had happened. But yeah, after that day, when […] Bitcoin went from $30,000 to $20,000 […] it was extremely painful for us. And that was it, it ended up being kind of a nail in the coffin. “

The GBTC problem

Another factor in the illiquidity of 3AC’s positions is a product of Grayscale: the Grayscale Bitcoin Trust (GBTC). Before the advent of Bitcoin ETFs, GBTC was one of the only regulated products in the US to trade the asset. Its popularity led it to trade at a premium to BTC.

Grayscale then allowed institutional investors to provide it with BTC in exchange for GBTC, thereby generating a premium for lenders. As a result, 3AC became the largest holder of GBTC with a position of over $1 billion.

This operation, because of the price delta between the underlying and the derivative, was supposed to ensure a profit for the investment fund. However, the counterpart of this operation was that the GBTC was to be blocked for six months. As many wanted to take advantage of the arbitrage opportunity, the price spread reversed, causing large losses to Three Arrows Capital, which suffered from locked-in positions.

In the face of this cascade of problems and threats, the founders feel it is in their interest to keep a low profile for the time being. At the same time, they say the focus is on the recovery process before considering anything else going forward.

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