The co-founders of a well-known crypto hedge fund, 3 Arrows Capital, with billions of dollars, have suddenly disappeared right when people want their money returned.
After days of rumors, there is now hard evidence that Three Arrows Capital, or 3AC, is not paying its business partners. This is because the company overleveraged itself before the recent “crypto winter,” which hit the industry and caused crypto prices to drop sharply. Companies are now trying to distance themselves from 3AC to reassure customers that their money won’t go down with the ship Zhu Su and Kyle Davies run.
“It’s fine to lose a bet, but at least be honest and don’t involve people who have nothing to do with it. “Don’t ghost on anyone because they might have been able to help you,” the head of trading at a company that works with 3AC said on Twitter.
The hedge fund and the early problem of 3 Arrows Capital
The hedge fund, which is mostly self-funded, has become a big investor in almost every part of the crypto industry and a big borrower. Over the last week, its inability to meet margin calls (money a company has to pay to cover losses) has caused concern in the sector.
In the last week, as the price of cryptocurrencies fell and it became clear that the company was selling tokens quickly, rumors started to spread that there were problems at 3 Arrows Capital. “They’re not talking to anyone,” a source at a crypto trading company who did not want to be named told The Financial Times. As the anger grew, 3AC’s usually talkative co-founders stopped talking until Su sent out a mysterious and ominous tweet on Tuesday. “We are in the process of talking to the right people and are fully committed to finding a solution,” he wrote, without giving any more information. Since then, neither he nor Davies have sent a tweet.
Danny Yuan, who is in charge of trading at Hong Kong-based 8 Blocks Capital, said in a statement on Wednesday that 3AC had stopped responding after 8 Blocks asked for a large withdrawal on June 13. After 3 Arrows Capital didn’t reply, a member of Yuan’s company noticed that “1m was missing from our accounts with them.” More attempts to get in touch with them didn’t work, so 8 Blocks Capital looked elsewhere for information.
“We found out that they had a lot of debt and were getting margin calls everywhere. They didn’t answer any of the margin calls—they just disappeared. The platforms had no choice but to sell their positions, which caused the markets to drop, even more, said Yuan. In other words, 3 Arrows Capital had borrowed money to bet on the price of cryptocurrencies going up. This is called “leverage,” meaning that any gains are bigger, but losses hurt much more. Yuan then asked platforms that held money for 3AC to freeze those funds.
In an interview with the Wall Street Journal that came out Friday morning, Zhu and Davies made their first public comments. They said that they were looking into asset sales and “rescue by another firm” and that they kept hoping to make a deal with their creditors to give the company some breathing room.
3 Arrows Capital’s effect on other companies
The crisis that seems to be happening at 3AC is already making waves in the industry. Finblox, a platform for generating revenue, said on Thursday that it would stop giving out rewards and limit withdrawals for all customers while it looked into how 3AC’s financial problems affected its platform. The company said that 3AC is one of its investors.
In a statement to Motherboard, the crypto lender BlockFi said that it is against company policy to “comment on specific counterparties.” This means that BlockFi would not say if it had declared bankrupt 3AC’s position. But BlockFi said that it “used our best business decision recently with a large client that failed to meet its commitments on an overcollateralized margin loan.” (Sources who didn’t want to be named told The Financial Times that BlockFi had sold 3AC’s position.)
The smell of 3 Arrows Capital is so bad that even people who have nothing to do with the company have felt the need to stay away. For example, Tether, a stablecoin currency, said that rumors that it had lent money to 3AC were “categorically false.”
The question is whether 3AC is a warning sign for crypto hedge funds or just a fund that took too many risks because it was too eager. Mike Novogratz, who started Galaxy Digital Holdings, has said that he thinks two-thirds of crypto hedge funds will fail in the next few months.
Since it started in 2012, 3AC has grown into one of the biggest crypto hedge funds in the world, and if it goes out of business, it could cause problems for the whole sector. Zhu and Davies have been friends since high school. They went to Columbia and worked as derivatives traders for Credit Suisse together. They started the fund while living in an apartment together, and Bloomberg says that they are now thought to be “among the world’s biggest crypto holders.”
Zhu said that because 3AC mostly (or maybe only) managed the co-founders’ own money, it was able to “make very good decisions about market timing.” It also lets people make unusually big and risky bets, and the company did amazing things for a while. Nansen, an analytics company, said that 3AC had about $10 billion worth of blockchain assets as of March, and the company has investments all over the crypto ecosystem. As of December, that included more than 5 percent of the Grayscale Bitcoin Trust, the largest Bitcoin fund in the world.
3 Arrows Capital borrowed money from a number of firms to increase the size of its bets, which greatly increased the amount of money it could win. But 3AC was hit hard when the crypto market started to fall. The hedge fund had put money into places like the play-to-earn game Axie Infinity and the Solana blockchain, whose token values have dropped in recent months. It also put money into Celsius, a cryptocurrency bank whose withdrawals have been stopped indefinitely because of rumors that it might go bankrupt. Luna, a cryptocurrency that crashed to almost nothing in a dramatic way, may have been 3AC’s worst bet.
Now, it looks like 3AC is trying to get money any way it can, like by selling a lot of tokens. One NFT fund supported by the corporation even relocated all of its 70 pieces of digital art on SuperRare, which it had spent more than $20 million acquiring, to a single address, signaling asset consolidation.
Before the crash, Zhu and Davies talked about the potential of cryptocurrency in an almost religious way. The libertarian Su had often pushed his “supercycle” theory in public, saying that crypto prices would keep going up as they became more popular than government currencies. “I also think we’re entering a time when it’s clearer than ever that Bitcoin could become one of the most important reserve currencies for people and countries,” Zhu told Bloomberg in April. “It won’t be easy, but the trip will be very important for those who go through with it.”
On May 27, Zhu said that his grand supercycle theory was “regretfully wrong.” He also said that “crypto will still thrive and change the world every day,” which Davies said in the Wall Street Journal. He said, “We’ve always been crypto fans, and we still are.”
Zhu Su and Kyle Davies gone missing
The current situation is really bad cause Zhu Su and Kyle Davies gone missing. The founders are said to have left Singapore, and no one knows where they are right now.
A court filing says that on July 8, people who called themselves “Su Zhu” and “Kyle” were on a Zoom call, but their video and audio were off the whole time. Despite being asked direct questions, neither person spoke.