How did Three Arrows Capital (3AC) Fall from the Top?

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Three Arrows Capital (3AC) is a Singaporean cryptocurrency hedge fund founded in 2012 by Kyle Davies and Su Zhu. At its peak, it even backed successful projects like AAVE, Ethereum, Polkadot, Solana e...

AI Analysis

So, we've all seen the recent pain in the crypto space, and one of the biggest stories is the epic downfall of Three Arrows Capital (3AC), a crypto hedge fund that once managed over $10 billion. They went from being a seemingly smart and successful entity, backing major projects like Ethereum and Solana, to filing for bankruptcy and owing a staggering $3.5 billion. It turns out, their aggressive leveraging and incredibly risky bets, especially on Terra Luna, led them down a path of no return.

Here's a breakdown of what happened:

* Who was Three Arrows Capital (3AC)?
* 3AC was a Singaporean crypto hedge fund founded in 2012 by Kyle Davies and Su Zhu.
* At its peak, it was incredibly successful, backing well-known projects such as Aave, Ethereum, Polkadot, and Solana.
* Despite their perceived intelligence and forex trading backgrounds, it seems they were actually some of the biggest "degens" (degenerate gamblers) in crypto.

* The Fed's Interest Rate Hikes and Su Zhu's Miscalculation:
* Starting in December last year, the Fed began raising interest rates to fight inflation, which usually makes risky assets like crypto less appealing.
* However, Su Zhu saw this as an opportunity to double down on crypto, using excessive leverage, which is like borrowing a lot of money to make bigger bets.
* He completely misjudged the market, as inflation remained at a 40-year high, and major protocols started failing.

* The Catastrophic Collapse of Terra Luna:
* 3AC made a huge, half-billion-dollar bet on Terra Luna, specifically its algorithmic stablecoin, UST.
* Terra Luna, founded by Do Kwon and Daniel Shin, was known for its Anchor Protocol, which offered a crazy 20% annual percentage yield (APY) for staking UST.
* 3AC staked a massive $500 million on Anchor Protocol, with Su Zhu reportedly earning $300,000 every single day.
* While staking, Su Zhu and Kyle Davies even made a down payment on a $15 million yacht, rumored to be bought with borrowed funds. They boasted it would be larger than any owned by Singapore's richest billionaires, showing their overconfidence.
* Many, including crypto veterans like Pantera Capital, were already offloading their Terra Luna stakes, but Su Zhu kept talking up its merits, which made some wonder if he was trying to offload his own holdings.
* The "death spiral" began on May 7, 2022, when over $2 billion worth of UST was unstaked and sold, causing its price to drop to 91 cents. This triggered a panic sell-off, as people rushed to get out.
* By May 13, UST had plummeted to just one cent. Since Terra Luna was a top 10 crypto by market cap, its collapse caused a huge ripple effect across the entire crypto market, demonstrating how interconnected everything is.
* 3AC was one of the first major crypto companies to fail directly because of Terra Luna, having put such a huge percentage of their funds into just one project. A whistleblower reported that 3AC's 10.9 million locked Luna, bought for $559 million, was soon worth a mere $670.

* Excessive Leverage and Bankruptcy:
After losing hundreds of millions on Terra Luna, 3AC's response was to take on more* leverage, which was a disastrous decision.
* They were unable to meet "margin calls"—demands from lenders to put up more collateral due to declining asset values—from their various lenders.
* Consequently, 3AC filed for Chapter 15 bankruptcy on July 1, 2022, in New York, which helps protect their US assets from creditors while liquidation proceeds in the British Virgin Islands, where they are based.
* Court documents show that 3AC owes a staggering $3.5 billion to 27 different companies.

* The Domino Effect:
* The collapse of 3AC created a "domino effect" throughout the crypto industry.
* For example, Voyager Digital, a publicly listed crypto brokerage firm, had lent a significant amount of money to 3AC. When 3AC couldn't pay it back, Voyager Digital suspended trading and withdrawals, and subsequently filed for bankruptcy themselves. This highlights how interconnected and vulnerable the crypto market can be when major players fail.

* The Founders' Reaction and Aftermath:
* Upon realizing the extent of their failure, Su Zhu urgently tried to sell his $34 million bungalow in Singapore, which was held in trust for his 6-year-old son. However, this wouldn't be enough to cover their massive debts.
* The founders initially seemed to be "running away" from angry creditors and liquidators. The court issued an order for them to attend, but in calls with liquidators, their videos were switched off, and audio muted, with neither of them speaking.
* After five weeks of hiding, Su Zhu and Kyle Davies finally did an interview with Bloomberg, essentially reiterating their colossal failure.
* It remains unclear if the founders will ever repay their debts.

* Key Takeaway:
* The ultimate lesson from 3AC's spectacular fall is the critical importance of self-custody in crypto. If you hold your own keys and control your own funds, no one can suddenly freeze them or lose them due to a third party's catastrophic mismanagement. It's a stark reminder that even seemingly smart and successful entities can turn $10 billion into zero due to reckless behavior and excessive leverage.

Transcript

This past two months, we have seen nothing but pain in the crypto space. Everything was on a doubtful, including massive crypto companies like 3L's Capital. It is a crypto hedge fund, and at one point, it had over $10 billion in AUM, but all of a sudden, it just failed and filed for bankruptcy. So what went wrong? I declare bankruptcy! How could the management of the company allow this to happen? In this video, I'll clear all that for you. If you find this type of content interesting, make sure...