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Downfall: Three Arrows Capital’s collapse explained

By Carine Lee

03:07, 29 July 2022

Person holding smartphone with logo of Three Arrows Capital
Co-founders went MIA after the crypto hedge fund went bust. – Photo: Shutterstock

What made one of the top firms in the cryptosphere, which at its peak managed around $18bn in crypto assets, tumble and fall towards the exploration of a financial bailout or asset sale?

Three Arrows Capital (3AC), a crypto hedge fund, tumbled when it suffered heavy losses due to the collapse of LUNA and Terra as it held a significant position in the two assets, roughly $560m at its peak.

3AC, co-founded by Zhu Su and Kyle Davies, is a Singapore-based crypto hedge fund operator, which has invested in tokens including ETH, SOL and LUNA (the original LUNA has since been replaced by LUNA2).

SOL to US dollar

The founders ran and defaulted on loans after the crypto hedge fund went bust from making a series of large directional trades (GBTC, LUNA, stETH) and borrowing from more than 20 institutions.

Legal proceedings then moved forward as the founders were nowhere to be seen.

A court document, filed with the Singapore High Court, was leaked, it asked the Singapore government to recognize liquidation proceedings and cooperate with liquidators.

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BTC/USD

66,076.70 Price
-0.420% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

DOGE/USD

0.16 Price
-0.160% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

BCH/USD

499.25 Price
-2.080% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.50

ETH/USD

3,258.18 Price
+1.490% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

Easter eggs

Several easter eggs were found in the document:

  • 3AC owes over $3bn and Genesis is its biggest creditor with $2.3bn loaned. 3AC’s default on debts also contributed to the insolvency of Celsius Network and Voyager Digital.

  • It was not until June that creditors realised 3AC was collapsing as it pitched to investors on a new opportunity to save the company; Davies tried to arrange a new loan from Genesis to pay margin call; and only in mid June that 3AC insolvency was reported. 

  • Zhu was also spendthrift, as the co-founder bought two Singapore ‘Good Class Bungalows’ and a yacht. It is also likely that the yacht was purchased on borrowed money as it was used as proof of 3AC’s creditworthiness.

ETH to US dollar

It seems that lenders did not do their homework and ended up lending money to a crypto hedge fund which has a combination of poor risk management, recklessness in dealing with business partners, and greed were the recipe for disaster.

It was recently brought to light that Davies’ wife and Zhu are creditors in the suit against 3AC, claiming that 3AC owes them money.

The duo finally broke their silence, with Zhu saying: “Given that we had planned to move the business to Dubai, we have to go there soon to assess whether we move there as originally planned or if the future holds something different for us,” in the report.

Markets in this article

ETH/USD
Ethereum / USD
3258.18 USD
47.7 +1.490%
LUNA2/USD
LUNA2.0 to USD
0.6820 USD
0.0002 +0.030%
SOL/USD
Solana / USD
158.3326 USD
0.6992 +0.450%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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