Bloomberg: Three Arrows Founders Reveal Multiple Collapse Details for the First Time (Full Text)

Authors: Joanna Ossinger, Muyao Shen, and Yueqi Yang, Bloomberg

Compiled by: Moni, Odaily Planet Daily

After hiding for five weeks, Three Arrows Capital founders Su Zhu and Kyle Davies gave an interview to Bloomberg at an undisclosed location.

They discussed many insider details and expressed regret over their crypto journey. They admitted that Three Arrows Capital experienced a systemic failure in risk management, which led to a significant impact on credit liquidity due to wrong bets. However, the two refused to disclose their location, but a lawyer on the phone indicated that their final destination is the United Arab Emirates.

35-year-old Su Zhu and Kyle Davies have been good friends since high school. They teamed up to build Three Arrows Capital into a crypto trading giant. However, due to poor speculation and leveraged trading, Three Arrows Capital ultimately triggered a domino effect of explosions—following its collapse, a series of chain reactions occurred: creditor bankruptcies, crypto market sell-offs, resulting in huge losses for Bitcoin and other token holders.

On their way to Dubai, the two described it as a "regrettable collapse."

When Over-Leverage Meets Crypto Winter

Recently, a court in the British Virgin Islands ordered the liquidation of the cryptocurrency hedge fund Three Arrows Capital, stating that they owe over $2.8 billion in unsecured debt. Court documents indicate that this number is expected to rise significantly. So far, the liquidators overseeing the bankruptcy have taken control of assets worth at least $40 million.

Su Zhu and Kyle Davies have long been among the most well-known bulls in cryptocurrency, yet driven by leverage, they gradually placed Three Arrows Capital at the "center of the explosion." As the cryptocurrency market crashed, Three Arrows Capital found itself in trouble. Su Zhu stated, "We positioned ourselves in a market that ultimately would not crash," while Kyle Davies added, "We stubbornly believed that the crypto market would always be good, and we had all, almost all, of our assets in Three Arrows Capital. Then, in good times, we did the best, but in bad times, we lost the most."

At the same time, Su Zhu and Kyle Davies believe that they were not the only ones with problems in the market; the poor market conditions, interconnected one-way bets, and loose lending strategies led to the bankruptcies of companies like Celsius Network, Voyager Digital, and BlockFi.

Su Zhu said, "It's not just us; companies like Celsius have problems. It's not surprising. We had our own capital, our own balance sheet, but we also absorbed deposits from those lenders, and then we generated returns for them. So if we were in the business of absorbing deposits and generating returns, you know, that means we would ultimately engage in similar trades."

Clearly, Su Zhu and Kyle Davies are deflecting responsibility, considering they had previously been strong advocates for crypto assets.

Just this week, reports emerged that Su Zhu had made a down payment on a $50 million yacht before the collapse of Three Arrows Capital, a claim that Su Zhu found offensive and labeled as defamation. Su Zhu explained, "The boat was purchased over a year ago, commissioned for construction, and used in Europe, and it has complete funding sources." Su Zhu denied claims of living a lavish lifestyle, pointing out that he rides a bicycle to work every day and that his family "only has two houses in Singapore."

"We have never spent a lot of money at any club. You know, we have never been seen driving Ferraris and Lamborghinis. I think this smear against us is just from a classic script, you know, when these things happen, when explosions occur, these are the headlines people like to see."

The "Tragedy" Triggered by Luna

Su Zhu and Kyle Davies admitted that they suffered significant losses from trading Luna and the now-defunct algorithmic stablecoin UST, expressing surprise at the speed of LUNA's collapse. Su Zhu explained:

"What we didn't realize was that Luna could almost go to zero in a matter of days, which would trigger a credit tightening across the entire industry and put immense pressure on all our illiquid positions. In hindsight, Three Arrows Capital may have been too close to Terra's founder, Do Kwon."

"When Do Kwon moved to Singapore, we began to understand him directly. And we just felt that the project would do something very big and had already done well." Su Zhu admitted he misjudged LUNA, saying, "LUNA's initial performance was too good, you know, too big, too fast. It felt very much like a Long-Term Capital Management opportunity for us, and others had similar trades that we all thought were good; LUNA grew too quickly."

One of the trades involved a token related to Ethereum called stETH—designed to release liquidity for staked ETH and widely used in DeFi. Once the long-awaited Ethereum blockchain upgrade took effect, each stETH could be exchanged for one ETH, but the turmoil triggered by Terra's collapse caused its market value to drop below that level, resulting in other investors engaging in risk control sell-offs.

Su Zhu further stated, "Because Luna had just gone down, it felt very much like a contagion; people would say, 'Well, is anyone else using long-staked ETH instead of being liquidated as the market falls?' So the entire industry was effectively looking for these positions, and you know, ultimately, those people were all hunted down."

Despite this, Three Arrows Capital was still able to continue borrowing from large digital asset lenders and wealthy investors just as the market crisis began—until they imploded.

After Luna's bankruptcy, Su Zhu stated that lenders were "satisfied" with Three Arrows Capital's financial situation and even allowed them to continue trading, "as if nothing was wrong"—as court documents now show, many of those loans required very little collateral.

"So I just think, you know, during that time, we continued to operate as usual. But yes, after that day, when Bitcoin dropped from $30,000 to $20,000, you know, that was very painful for us, and it was also the last nail in our coffin. If we had been more involved in the game, we would have seen that the credit market itself is a cycle, you know, we might not have been able to obtain additional credit when we needed it."

Locked by GBTC

The Grayscale Bitcoin Trust (GBTC) is a closed-end fund that allows those who cannot or do not want to hold Bitcoin directly to purchase shares in a fund that invests in it. For a time, GBTC was one of the few crypto products regulated in the U.S., so it had its own market and was so popular that its shares traded at a premium to the value of the Bitcoin it held in the secondary market.

On the other hand, Grayscale allowed large investors like Three Arrows Capital to directly purchase shares by delivering Bitcoin to them, and then these GBTC holders could sell their shares in the secondary market. This premium meant that any sale could bring substantial profits to large investors. The last filing submitted to regulators at the end of 2020 showed that Three Arrows Capital was the largest holder of GBTC, with positions valued at $1 billion.

However, this strategy had a drawback: shares purchased directly from Grayscale had a six-month lock-up period. Starting in early 2021, this restriction became a problem as GBTC's price slid from a premium to a discount—a share worth less than the Bitcoin backing it—resulting in this product facing fiercer competition from other similar products. Months later, GBTC's discount widened, and the so-called GBTC arbitrage trades ceased to work—especially hurting those investors who used leverage to try to enhance returns—Three Arrows Capital was also affected.

In Su Zhu and Kyle Davies' account, part of the reason for investing in GBTC was their herd mentality: "The profits at that time were very large, and we managed to do it in the right window, and then like everyone else, we started to lose money, and it turned negative. Our trust was discounted, and the extent of the discount was much larger than anyone imagined."

No Such Thing as Risk-Free Returns!

There is never an investment without risk.

When asked what went wrong with Three Arrows Capital, Su Zhu stated that years of bull markets led him to become overly confident in the market, a mindset that not only influenced him and Kyle Davies but also permeated almost every credit infrastructure service provider in the crypto industry.

Su Zhu said, "You always need to have an understanding of the field you are entering—when choosing investments, you need to discern whether there is risk. For us, if you visit our website, we always have a lot of disclaimers about crypto risks; we have never portrayed ourselves as risk-free."

He said that when the crypto market began to decline in May, "we met all margin call requirements, so we felt that people should understand that there are risks involved. When we did well, lenders benefited immensely because when we did well, they could say, 'Look, I can earn $200 million a year from Three Arrows Capital's lending business, achieving 10 times returns.' But now, the situation is completely the opposite."

Currently, Su Zhu and Kyle Davies are heading to Dubai, with Su Zhu hoping to proceed step by step to liquidate through his private assets. Su Zhu revealed that there are even people in the crypto industry who have issued death threats against them, so they now hope to ensure personal safety and keep a low profile, "which is beneficial for everyone."

Su Zhu concluded, "Given that we plan to move the business to Dubai, we must go there as soon as possible to assess whether we can relocate the company as planned or if there will be other ideas in the future, but the current situation is very unstable, and the main focus is on helping creditors with repayments."