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The Rise and Fall of 3AC

Su Zhu and Davies seem to understand the structural opportunities of cryptocurrencies very well and have the ability to convince others how to turn virtual currencies into real wealth.They build credibility on social media by playing billionaires and financial geniuses while turning that credibility into actual financial credit.Before you know it, two pretending billionaires have turned into real billionaires who can buy superyachts.

They boasted about a beautiful $50 million yacht in Italy, as white as Santorini, with five decks-one with a glass-bottom pool. Su Zhu said the yacht is "bigger than all the yachts owned by all the billionaires in Singapore". But they weren't able to sail the yacht, called "Much Wow," for a cocktail off the coast of Ibiza or a sunset dinner in Sicily. In July 2022, the same month the boat was set to launch, the duo filed for bankruptcy and disappeared before making their final payment, making the "Much Wow" docked at the berth in La Spezia, Italy, a joke.

Millions of cryptocurrency holders were shocked and dismayed to witness the fall of the world's most respected investment fund in the crypto industry, and those investors who heavily bet on 3AC have tasted the bitter fruit. Digital asset broker Voyager Digital files for bankruptcy protection as 3AC can’t repay $670 Million Borrowed, as well as cryptocurrency loan company Genesis and lending platform BlockFi, also Crypto derivatives platform BitMEX, and crypto exchange FTX… It's very much like the scene of a serial car crash, with markets chaotic and forced sell-offs that have caused Bitcoin and other crypto assets to plummet by 70% in value or more. In one night, $1 trillion evaporated from the market.

The money seems to have disappeared now, along with Su Zhu and Davies, no one knows where they are. The 35-year-old co-founders have now become the embodiment of arrogance, greed, recklessness, and absurdity in the industry.

Su Zhu and Davies met at an elite Massachusetts boarding school with students mostly from wealthy and prominent families, Zhu and Davies grew up in relatively modest circumstances in the Boston suburbs. Su Zhu immigrated to the United States with his family when he was 6 years old. “Both of our parents are not, like, rich, ” Davies said in an interview.“We are very much middle-class guys.” “We went to high school together, we went to college together, and we got our first job together.” The university mentioned here is Columbia University. Su Zhu graduated one year earlier with honors and found a job at Credit Suisse. Then Davies also joined this company, and their desks were next to each other.

Su Zhu was fired from Credit Suisse in the year of the financial crisis and moved to Flow Traders exchange in Singapore, a proprietary trading firm providing liquidity. It was there that Zhu learned the art of arbitrage — attempting to capture small variations in relative value between two linked assets, typically selling the one that’s overpriced and buying the one that’s underpriced. After Flow, Zhu did a stint at Deutsche Bank, while Davies had stayed on at Credit Suisse.

When Zhu and Davies met again, both seemed tired of their big bank life and decided to start their own business. It was 2012 and they were only 25 years old. Zhu and Davies pooled their savings and borrowed money from their parents to scrape together about $1 million in seed funds. In less than two months, they had doubled their money, which ignited the ambitions of the two young men.

In 2013, Su Zhu and Davies came to Singapore, where there is no capital gains tax, to register a hedge fund called Three Arrows Capital. "Three Arrows" is taken from the Japanese legend the "lesson of the three arrows", which refers to General Mōri Motonari during the Warring States Period, who used the three arrows to break the principle to teach the three sons the importance of unity.

3AC initially focused on a niche market, arbitraging financial products in emerging markets where foreign exchange derivatives were tied to the future prices of smaller currencies, often earning only a few cents per dollar traded.

As digital assets took off in 2016, Su Zhu and Davies found that the emerging cryptocurrency market was full of potential. Since then, 3AC has turned its full attention to the cryptocurrency market. There is a basic fact to understand, Bitcoin hit an all-time high of $20,000 at the end of 2017 and then fell to $3,000, at a time when thousands of smaller coins emerged in the market. In this context, the 3AC investments came at the right time, when they came to crypto, everyone thought they were geniuses.

With cryptocurrencies trading on exchanges around the world, the firm’s experience with arbitrage came in handy right away. One famous trading strategy was known as the “kimchee premium” — it involved buying bitcoin in, say, the U.S. or China and selling it at a higher price in South Korea, where the exchanges were more tightly regulated, resulting in higher prices.

Another way of arbitrage by Three Arrows is to buy bitcoin at the current price and simultaneously sell bitcoin futures, or vice versa, for a premium.“The Fund’s investment objective is to achieve consistent market neutral returns while preserving capital,” 3AC’s official documents read. Of course, investing with limited downside, no matter what the broader market is doing, is called "hedging." But hedging strategies tended to require more capital when executed at scale, so 3AC started borrowing money everywhere.

3AC’s largest and most important position is a bitcoin traded on the stock exchange known as GBTC. GBTC was so popular at the time that its stock traded at a persistent premium to the value of its bitcoin holdings. For a while, GBTC was one of the few cryptocurrency products regulated in the US, GBTC had its own market, it was a way to own bitcoins in e-Trade account without the need for an esoteric wallet. This simple way to make money is to borrow bitcoin, exchange it for GBTC shares, and then sell those shares at a premium. "3AC" was the largest holder of GBTC at the time, and it held positions worth as much as $1 billion.

3AC's growth strategy also has a special plan that relies on the influence of social media. Su Zhu gained 570k followers by promoting his theory of cryptocurrency "supercycles". He kept emphasizing in crypto podcasts and videos: buy, buy, buy now, the Supercycle will drive you crazy one day. Along the way, 3AC expanded from Bitcoin to a series of start-up cryptocurrencies or those more obscure “shitcoins.”

The absolute development prospect of "3AC" has become one of the world's famous cryptocurrency hedge funds. Although its assets are not significant by the standards of Wall Street, it is heavyweight in terms of digital assets. Bitcoin has quintupled from its March lows at the end of 2020, which to many looked like a megacycle, with the return at over 5,900%, according to the annual report.

By this time Su Zu and Davies, both fathers, were avid exercisers and restricted calories in their diets. They have become accustomed to their own interpretation of the wealth story. Davies made efforts to customize a Toyota Century for himself, a Japanese-exclusive sedan that costs as much as a Lamborghini, while Su Zhu bought two mansions worth $20 million and $35 million in the names of his wife and daughter, respectively.

But no one could have imagined that the troubles of "3AC" were just to begin. "3AC" is a huge funnel of borrowed funds, and the huge bet on GBTC is the key to the problem. Just as the company was rewarded when it was at a premium, it also felt the pain when GBTC started to be traded below bitcoin. However, the GBTC premium was a result of its original uniqueness, which disappeared as more and more people poured in, it even turned negative.

Su Zhu and Davies had a chance to quit at some point last year, but they didn't. The bear market of cryptocurrencies often makes any stock market behavior seem like child's play, and no one thought that the collapse of "3AC" could be so close and so severe.

In January 2022, Su Zhu and Davies found that GBTC's position had created a big loss in the balance sheet, and other arbitrage opportunities had dried up, so "3AC" made an extreme response, they decided to increase investment risk in order to get the company back on its feet.

In February, 3AC invested $200 million in a popular token called LUNA. Co-founded by an arrogant Korean developer and Stanford dropout student Do Kwon, LUNA is a cryptocurrency launched by the blockchain platform Terra, which once ranked among the top ten virtual currencies in the world.

At the beginning of May, someone suddenly sold about 84 million US dollars of UST, the price of UST began to decouple from the US dollar, panic began to spread, UST that was sold in large quantities began to plummet, and LUNA, which UST depended on for survival, fell from US $80 to $0.0002718, collapsing by 99.9%. The crash immediately made global headlines, and investors' $60 billion was instantly wiped out. 3AC's original $559.6 million investment in LUNA also dropped to only $604.

The collapse of UST and LUNA is the trigger point of this chain-car-crash like cryptocurrency vaporization, and the first domino to fall in the “chain of lending and fraud nightmare”, and “3AC” is the largest in this series of dominoes thereafter. Thus, the excessive use of leverage by "3AC" has also been exposed. Investors who bet on "3AC" are suffering the consequences of failure, but at this time Su Zhu and Davies are hiding, claiming they have received death threats.

On July 1, "3AC" filed for bankruptcy in the Southern District of New York. On July 18, according to court filings, “3AC” owed up to $3.5 billion in debt to 27 different companies. These companies are all leading institutions in the cryptocurrency industry, among whom some are on the same track with “3AC” for liquidation.

On July 21, after five weeks in hiding, Su Zhu and Davies were interviewed at an undisclosed location. They admitted that the risk management of "3AC" has systematically failed, and the wrong bet has caused a huge impact on liquidity. Well-known analyst Miles Deutscher commented on this, saying that a mix of poor risk management, greed and recklessness has led to insolvency which has severe ramifications for the entire space.

“People may call us stupid. They may call us stupid or delusional. And, I’ll accept that. Maybe,” Zhu said. “But they’re gonna say that I absconded funds during the last period, where I actually put more of my personal money back in. That’s not true.” “We positioned ourselves for a kind of market that didn’t end up happening”

“We believed in everything to the fullest,” added Davies. “We had allof our, almost all of our assets in there. And then in the good times we did the best. And then in the bad times we lost the most.”


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