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Crypto hedge fund Three Arrows Capital just blew up

Photo: Intelligencer; Photos: 3 Arrows Capital

Ever since two of the world’s largest cryptocurrencies collapsed in May, there has been no shortage of rumors about what would be the next big thing to implode. These two digital currencies, TerraUSD and Luna, have been part of the firmament of the crypto landscape ever since their creator, Do Kwon, attracted more than $60 billion from hedge funds and individuals alike with promises of 18 percent returns and stable earnings — two promises that are growing contradict afterwards. The fallout continued for weeks, and then on Tuesday, the CEO of one of the major crypto mutual funds that had helped shore up Kwon’s empire, Three Arrows Capital, made a gnomish comment of his own about the state of his fund:

Now, with much of the crypto market down 90 percent or more from its all-time highs, Three Arrows Capital, until recently one of the most prominent and respected players in the space, is either dead or alive. In conversation with That Wall Street Journal, Su Zhu and Kyle Davies, co-founders of 3AC, confirmed that the fund is looking for a larger fund to bail it out. “We weren’t the first to be hit… This was all part of the same contagion that has hit a lot of other companies,” Davies told the newspaper.

The fund can trace its beginnings to Phillips Academy Andover, the elite Massachusetts private high school where Zhu and Davies first met. From there, the two friends went to Columbia and then both worked for Credit Suisse for a short time before founding the fund in 2012. Along the way, they made some big bets in crypto investing that ended up fizzled (although by how much is unclear). of a hit they suffered at the end). But like everything else in the crypto world, there was a lot of niche and passionate marketing to fuel the whole endeavor. Zhu seems to have been happy to court an online following, start an investment podcast, play chess on Twitch against one of the game’s biggest online stars, and even post thirst traps to document his “fitness journey.”

That diary Piece answers some basic questions about 3AC, but ultimately leaves many more questions unanswered about its overall footprint. Zhu’s fund had invested $200 million in Luna tokens, meaning he would have been one of the largest investors in a $1 billion round that helped start the now-defunct cryptocurrency’s skyrocketing popularity to advance this year. (Further details on the terms of the deal were not disclosed.) The diary also says the fund had around $3 billion in assets in April before the collapse, but it’s unclear how leveraged the fund was and how well it can meet its commitments. A report by crypto news site The Block shows that 3AC is already failing to repay its creditors.

One of the things about this particular boom-and-bust cycle with crypto is how the industry has tried to reshape traditional finance and ended up hitting the same issues as the “TradFi” world. The reasons for this bust are as simple and analogous as any old-fashioned bankrun. Danny Yuan, the CEO of Hong Kong trading company 8 Blocks Capital, published a thread on Twitter explained how 3AC allegedly broke a trading agreement between the companies and dived into an account it shouldn’t have. (I’ve reached out to Davies and Zhu but haven’t heard back.)

The news of 3AC’s apparent bankruptcy could hardly have come at a worse time. Crypto tends to be particularly volatile on weekends due to so few people trading. With Father’s Day and June 16 happening back-to-back in the US, this should leave markets even more vulnerable to crashes than usual. All of this is likely bad news for Davies and Zhu as they attempt to exit their fund. Any shopper out there looking to pick the meat off the bones might be better off waiting a few days to get even more of a discount.

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