Trillions of dollars evaporated in the crypto market, are they geniuses or devils?

Original article: https://nymag.com/intelligencer/article/three-arrows-capital-kyle-davies-su-zhu-crash.html

ByJen Wieczner

The ship is beautiful: weighing around 500 tons, made of 171 feet of glass and steel, as white as Santorini. All rounded edges, five decks — one with a glass-bottom pool — are designed for July in the Mediterranean, sunset dinners on the islands off Sicily, teal cocktails in the shallows of Ibiza. Her prospective captains showed pictures of the $50 million yacht at the party, boasting that it would be "bigger than all the richest billionaires in Singapore" and describing the use of projector screens adorning the cabins. plans to collect more and more digital art for them in the form of NFTs.

Although they initially told friends they were buying a $150 million boat; the superyacht is still the biggest ever sold in Asia by established shipbuilder Sanlorenzo, a win for the crypto upstart . "This represents the beginning of a fascinating journey," the yacht broker said in announcing the sale last year, adding that it looked forward to "many happy moments on board".

Her buyers, Su Zhu and Kyle Davis, graduated from Andover and run a cryptocurrency hedge fund in Singapore called Three Arrows Capital. However, in July, the same month the boat was set to launch, the pair filed for bankruptcy and disappeared before paying the final payment, leaving the unclaimed yacht at her yacht in La Spezia, off the coast of Italy. on the berth. While she has not yet been officially listed for resale, international superyacht dealers have quietly noticed the relaunch of a certain Sanlorenzo 52 Steel with the Cayman Islands flag flying above her.

Since then, the yacht has been the subject of endless memes and jokes on Twitter, the functional hub of the crypto world. Almost everyone in the world, from the millions of small-scale cryptocurrency holders to industry employees and investors, watched with shock and dismay as the painful and embarrassing collapse of Three Arrows Capital, which could have been The most respected investment fund in the booming global financial industry. The company's implosion, the result of reckless and possibly criminal behavior, unleashed a contagion that not only forced a historic sell-off in Bitcoin and its ilk, but also wiped out swathes of the cryptocurrency industry.

Crypto companies from New York to Singapore are direct victims of Three Arrows. Voyager Digital, a New York-based cryptocurrency exchange once valued in the billions, filed for Chapter 11 bankruptcy in July, reporting that Three Arrows owed it more than $650 million. Park Avenue-based Genesis Global Trading provided a $2.3 billion loan to Three Arrows. Blockchain.com, an early-stage cryptocurrency company that offered digital wallets and grew into a major exchange, faces a $270 million outstanding loan from 3AC and has laid off a quarter of its workforce.

The smartest observers in the crypto space generally believe that Three Arrows is largely responsible for the larger crypto crash in 2022, as market chaos and forced sell-offs cause Bitcoin and other digital assets to plunge by 70% or more. $1 trillion worth. FTX is a major cryptocurrency exchange that has bailed out a number of bankrupt banks. FTX has bailed out a number of bankrupt lenders, and he probably understands these issues better than anyone. “They’re not the only ones that went bankrupt, but they’ve done it bigger than anyone else. Before that, they got a lot from the ecosystem.” More trust."

For a company that has consistently portrayed itself as only playing with its own money — “We don’t have any outside investors,” 3AC’s chief executive told Bloomberg as recently as February — the damage Three Arrows has done is staggering. By mid-July, creditors had filed claims of more than $2.8 billion; that number is expected to grow. Everyone from the largest lenders to wealthy investors appears to have lent their digital currency to 3AC, even 3AC's own employees, who deposit their salaries into its "borrowing platform" in exchange for interest. “A lot of people were disappointed, some of them were embarrassed,” said Alex Svanevik, chief executive of Singapore-based blockchain analytics firm Nansen. "They shouldn't be doing it because a lot of people fell for it, a lot of people gave them money."

That money now appears to be gone, along with the assets of several affiliated funds and some funding for various crypto projects managed by 3AC. The true scale of the losses may never be known; for the many crypto startups that park funds with the firm, publicly disclosing the relationship could risk heightened scrutiny from investors and government regulators. (For this reason, and the legal complexities of being a creditor, many of those who spoke about their experiences with 3AC requested anonymity.)

Meanwhile, the unclaimed yacht appears to be a slightly absurd embodiment of the arrogance, greed and recklessness of the company's 35-year-old co-founder. Zhu and Davis are currently believed to be in hiding as their hedge fund is in the midst of a chaotic liquidation process. (Multiple emails to them and their attorneys seeking comment went unanswered, save for an automated reply from Davis that read: "Please note I am out of the office at this time.") For a constant debate about the nature of cryptocurrencies For the industry defending itself against allegations that it was a hoax, "Three Arrows" seemed to prove the opponent's point.

Zhu and Davis, two ambitious young men who are said to be very bright, seem to understand the structural opportunity of digital currencies very well: Cryptocurrency is a game of creating virtual wealth out of thin air and allowing others who use traditional forms of money to Believe that these virtual wealth are the same as real world wealth. They build social media credibility by impersonating billionaire financial geniuses, turning it into actual financial credit, and then borrowing billions of dollars for speculative investments, which they can help through their massively influential platforms. push successfully. Before you know it, the pretend billionaire is the real billionaire buying a superyacht. They fumbled the game, and the plan worked perfectly -- until it failed.

Su Zhu and Kyle Davis met at Phillips Academy in Andover, Massachusetts. They started high school the same week after 9/11. While many of Andover's students come from wealthy or prominent families, Andover is considered a top boarding school, Zhu and Davis grew up in relatively modest surroundings in suburban Boston. "Neither of our parents were wealthy," Davis said in an interview last year. "We're basically middle class." They're not particularly popular, either. "They were all called weirdos, especially Zhu," said a classmate. "Actually, they're not weird at all - just shy."

Zhu, a Chinese immigrant who came to the U.S. with his family when he was 6, is known for his stellar GPA and extensive AP courses; He received a Special Mention in Mathematics, but he was more than just a numbers junkie - he also graduated with the top prize of the Andover Prize for Fiction. "Zhu was the smartest guy in our class," recalls a classmate.

Davis was the star of the boat team, but the rest of the class remembered him as an outsider—if they remembered him at all. A budding Japanese, Davis graduated with highest honors in Japanese. According to Davis, he and Zhu were not particularly close at the time. “We went to high school together, we went to college together, we got our first job together. We were never the best of friends,” he said on the Crypto 2021 podcast. “I didn’t know him that well in high school. I knew he was a smart guy - he was like the valedictorian of our class, but in college we started hanging out more together. "

"Going to college together" was at Columbia University, where they both took math classes and were on the squash team. Zhu graduated a year early with honors, then moved to Tokyo to work in derivatives trading at Credit Suisse, where Davis interned with him. They sat next to each other's desks until Zhu was fired in the midst of the financial crisis to work at a high-frequency trading firm in Singapore called Flow Traders.

There, Zhu learned the art of arbitrage — trying to capture small changes in the relative value between two related assets, usually by selling an overpriced asset and buying an underpriced one. He focuses on exchange-traded funds (basically mutual funds that are listed like stocks), buying and selling related funds for a small profit. He excels at this and ranks among Flow's moneymakers. This success gave him new confidence. He has been known to be outspoken in his criticism of the performance of colleagues and even his boss. Zhu stood out in another way: Flow's office, full of servers, was so hot that he would come to work in shorts and a T-shirt, then remove his shirt, which he wouldn't take off even as he walked across the building's lobby. “Zhu would walk around shirtless in his mini shorts,” recalls a former colleague. "He's the only one who's going to trade his shirt off."

After Flow, Zhu spent a stint at Deutsche Bank, following in the footsteps of crypto legend and billionaire co-founder of BitMEX exchange Arthur Hayes. Davis stayed with Credit Suisse, but by then both were tired of life at the big banks. Zhu complained to acquaintances about his low-quality bank colleagues and a bloated culture that allowed people to lose the company's money on deals with little consequence; in his view, the best talent had left for hedge funds,

Or stand on your own. He and Davis, now 24, decided to start their own company. "There's almost no harm in leaving," Davis explained in an interview last year. "Like, if we left and really screwed things up, we'd definitely get another job."

Living temporarily in San Francisco in 2012, Zhu and Davis pooled their savings and borrowed money from their parents to raise about $1 million in seed funding for the formation of Three Arrows Capital. The name comes from a Japanese legend in which a prominent warlord taught his sons to distinguish between the impossibility of breaking one arrow and the impossibility of breaking three arrows.

They doubled their money in less than two months, Davis said on the UpOnly podcast. The pair soon traveled to Singapore, which has no capital gains tax, and by 2013 they had registered the fund there, planning to give up their US passports and become citizens. Zhu is fluent in Chinese and English and moves freely in Singaporean social circles, occasionally hosting poker games and friendly matches with Davis. Still, they seem frustrated with not being able to take Three Arrows to the next level. At a dinner around 2015, Davis lamented to another trader how difficult it was to raise money from investors. The trader wasn't surprised -- after all, Zhu and Davis had little background or track record.

At this early stage, Three Arrows focused on a niche market: arbitrage emerging market foreign exchange (or "FX") derivatives -- financial products pegged to the future price of a smaller currency (such as the Thai baht or Indonesian rupiah). BitMEX's Hayes wrote in a recent Medium post that access to these markets, which depend on having strong trading relationships with big banks, is "nearly impossible." "When Su and Davis told me how they got started, I was impressed by their haste into this lucrative market."

At the time, foreign exchange trading was moving to electronic platforms, and it was easy to spot differences or spreads between quotes from different banks. Three Arrows has found its sweet spot, hunting for mispricing among public companies and, in Wall Street parlance, "knocking it out," often earning less than a penny on every dollar traded. It's a tactic that banks loathe - Zhu and Davis are basically grabbing money that the institutions would otherwise have access to. Sometimes, when the banks realized they had misquoted Three Arrows, they would ask to amend or cancel the deal, but Zhu and Davis were unwilling to budge. Last year, Zhu tweeted a photo of himself smiling in front of 11 screens in 2012. He seemed to refer to their forex trading strategy of picking quotes from banks, writing, "You don't live until you beat five traders on the same quote at 2:30am."

By 2017, banks started cutting them off. "Whenever Three Arrows asked for a price, all the bank FX traders said, 'Fuck these guys, I'm not going to price them,'" said a former trader who was a 3AC counterparty. Lately, there has been a running joke among forex traders that they knew about Three Arrows in its early days and watched it fail a bit with schadenfreude. "We the forex traders are partly responsible for this because we know these people can't make money in forex," the former trader said. "But when they came to crypto, everyone thought they were geniuses."

The most basic thing we need to know about cryptocurrencies is that, so far, it has gone through a series of extreme but roughly regular boom and bust cycles. The 2018 bear market was a particularly painful one in Bitcoin’s 13-year history. After hitting an all-time high of $20,000 in late 2017, bitcoin plummeted to $3,000, dragging down thousands of smaller-cap coins on the market. It was against this backdrop that Sanjian turned its attention to cryptocurrencies, investing at such an opportune time that Zhu is often credited with foretelling the bottom of the cycle. In later years, it looked glorious to the many impressionable crypto newbies — and even industry insiders — who followed Zhu and Davis on Twitter. But the timing might just be luck. After all, Sanjian was looking for a new racket.

The company's experience in arbitrage came in immediately as cryptocurrencies were traded on exchanges around the world. One well-known trading strategy is known as “kimchee premium” — it involves buying bitcoin in places like the U.S. or China and selling it at a higher price in South Korea, where exchanges are more regulated, leading to Price increased. At the time, winning such deals was substantial and profitable. They are the main business of Three Arrows Capital, which tells investors it operates a low-risk strategy designed to make money in both bull and bear markets.

Another type of crypto arbitrage could involve buying bitcoin at the current (or "spot") price while simultaneously selling bitcoin futures, or vice versa, to capture a price premium. "The fund's investment objective is to achieve consistent market-neutral returns while preserving capital," reads 3AC's official filing. Investing in such a way that the downside is limited no matter what the broader market is doing is of course called "hedging" (hence the hedge fund's name). But hedging strategies tend to split the most money when executed at scale, so Three Arrows started borrowing money and putting it to work. If all goes well, it could generate profits that exceed the interest it owes on loans. Then it would do it all over again, continuing to expand its investment pool, which would allow it to borrow larger amounts.

In addition to borrowing heavily, the company's growth strategy rests on another plan: building a massive social media presence for the two founders. In the crypto space, the only social media platform that matters is Twitter. Many of the key figures that have become global industries are anonymous or pseudo-anonymous Twitter accounts with goofy cartoon avatars. In an unregulated space devoid of traditional institutions and global markets trading 24/7, crypto-twitter is the center of the arena, a clearinghouse for market-moving news and opinions.

Zhu and Davis have earned their way into the upper echelons of the crypto-twitter elite. According to friends, Zhu has a plan to become a "Twitter celebrity": It needs to tweet a lot, cater to the crypto masses with wildly optimistic forecasts, attract a large following, and become a top predator on crypto-twitter at the expense of Everyone else profited at the expense.

Zhu has gained 570,000 followers by promoting his theory of a cryptocurrency "super cycle" -- that is, a multi-year bull market in Bitcoin that sees prices rising into the millions of dollars per Bitcoin. “As the crypto super cycle continues, there will be more and more people trying to complain about how early they are,” Zhu tweeted last year. “The only thing that matters is how many tokens you have now. Either you own the critical percentage of the network you should have, or you don’t. Early days and low conviction are creepy.” And: “As the supercycle continues, Mainstream media will try to talk about how the early whales had it all.”The richest man in crypto has a net worth close to zero in 2019. I know people sarcastically saying that if someone lent them another $50,000, they would now be $500 million more. ”Zhu keeps emphasizing this on the platform and in crypto podcasts and video shows: buy, buy, buy now, the super cycle will make you rich one day.

“They used to brag that they could borrow as much as they wanted,” said the former trader, who knew them in Singapore. "It's all planned, man, from the way they build their credibility to the way the fund is structured."

As it has grown, Three Arrows has expanded from Bitcoin to a string of startup crypto projects and more obscure cryptocurrencies. The company seems to be pretty indiscriminate with these bets, almost as if it's treating them like a charity. Earlier this year, Davis tweeted: "It doesn't really matter what VCs invest in, more fiat in the system is good for the industry." Chris Burniske, founding partner of venture capital firm Placeholder, said, "They Clearly casting a net and praying.” (meaning spreading one’s message as far as possible and praying it works)

Many investors remember their first sense that something might go wrong for Sanjian in 2019. That year, the fund began reaching out to industry peers, calling it a rare opportunity. 3AC invested in a crypto options exchange called Deribit and sold a stake; the term sheet values Deribit at $700 million. But some investors noticed that the valuation seemed off — and found it was only worth $280 million. It turned out that Three Arrows was trying to sell some of its investments at premium prices, essentially generating huge kickbacks for the fund. It's a rough approach in venture capital that caught outside investors, as well as Deribit itself, off guard. “Since then, I basically stay away from them, have a low opinion of them and don’t want to do business with them,” said David Fauchier, a portfolio manager at Nickel Digital Asset Management.

But the company is thriving. The cryptocurrency market has rallied for months amid the pandemic as the Federal Reserve pumped money into the economy and the U.S. government handed out stimulus checks. By the end of 2020, Bitcoin had quintupled from its March lows. To many, this looks like a super cycle. According to the annual report of Three Arrows Fund, the return rate of its main fund exceeded 5900%. By the end of the year, the firm managed more than $2.6 billion in assets and $1.9 billion in liabilities.

One of 3AC’s largest positions — and a key one in its fortunes — is in a form of bitcoin traded on the stock exchange called GBTC (short for Grayscale Bitcoin Trust). The company moved away from the old routine of making profits through arbitrage, amassing as much as $2 billion in GBTC. At the time, it was trading at a premium to regular bitcoin, and 3AC was happy to pocket the difference. On Twitter, Zhu has frequently posted bullish comments about GBTC, observing at various moments that it is "sensible" or "smart" to buy GBTC.

Zhu and Davis’ public personas have grown more extreme; their tweets have grown more flamboyant, and social acquaintances say they can’t be bothered to hide their condescension toward former friends and less wealthy peers. "They don't have much empathy for most people, especially ordinary civilians," said a former friend.

Three Arrows is known for high staff turnover, especially among traders who complain that they are never recognized for winning deals, but insulted as stupid when they screw up - even their salaries are garnished and their bonuses cut up.

Zhu and Davis have kept the company's inner workings secret. Only the two of them can transfer funds between certain encrypted wallets, and most Three Arrows employees have no idea how much money the company manages. While staff complained about the long hours, Zhu was reluctant to hire new people for fear they would "give away trade secrets," the friend said. In Zhu's view, Sanjian is doing favors for anyone who works for it. "Zhu said they should be paid for providing valuable learning opportunities for their employees," the friend added. Some business acquaintances in Singapore describe the 3AC founder as a 1980s character on the Wolf of Wall Street trading floor.

The pair, both now married fathers with young children, have become exercise fanatics, exercising as many as six times a week and following calorie-restricted diets. Zhu has reduced his body fat to around 11 percent and tweeted an "update" on his shirtless appearance. A friend recalls calling his personal trainer "fat" on at least one occasion. When asked if he wanted to be "strong," Zhu told an interviewer, "I've been very weak most of my life. After COVID, I got a personal trainer. I have two. Kids, get up every morning, play with the kids, go to work, go to the gym, come back, put them to bed."

While not yet billionaires, Zhu and Davis are beginning to enjoy some of the luxuries of the super-rich. In September 2020, Zhu bought a $20 million mansion in his wife's name, known in Singapore as a "high-end bungalow". He bought another set in his daughter's name the following year for $35 million.

Personally, though, Zhu remains an introvert who doesn't like small talk. Davis has been an outspoken voice in both the company's business dealings and social engagements. Some acquaintances who encountered the pair on Twitter for the first time found themselves surprisingly low-key. Davis has a hippie air about him. “He was very dismissive of a lot of mainstream, popular stuff,” said a former friend. When he became wealthy, Davis went out of his way to purchase and customize a Toyota Century, the exclusive model for Japanese limousine drivers. It's a simple-looking car, but it costs about the same as a Lamborghini. “He is very proud that this is the only Japanese taxi in Singapore,” said another friend.

While Zhu and Davis got used to their new wealth, Three Arrows remained a huge funnel for borrowed funds. A lending boom has hit the crypto industry as DeFi (short for "decentralized finance") projects offer savers far higher rates than traditional banks can offer. Three Arrows will take custody of cryptocurrencies belonging to employees, friends and other wealthy individuals through its “borrowing platform.” When lenders asked Three Arrows for collateral, it was often rejected. Instead, it offered to pay a rate of 10% or more, higher than any competitor was offering. As one trader put it, some lenders don’t ask for audited financial statements or any documentation at all due to their “gold standard” reputation. Even large, well-capitalized, professionally run crypto companies provided 3AC with large sums of unsecured money, including Voyager, which was eventually forced into bankruptcy.

For other investors, Sanjian's need for cash is another warning sign. In early 2021, a fund called Warbler Capital, run by a 29-year-old Chicago native, was trying to raise $20 million for a strategy that largely involved outsourcing its capital to 3AC. Matt Walsh, co-founder of cryptocurrency-focused Castle Island Ventures, can't fathom why a multibillion-dollar foundation like Three Arrows bothers to commit such relatively small incremental amounts of money; despair. "I sat there scratching my head," Walsh recalls. "It's starting to ring alarm bells. Maybe these people are insolvent."

The trouble seems to have started last year, with Sanjian's huge bet on GBTC being the key to it. Just as the company was rewarded at a premium, it suffered when GBTC started trading at a discount to Bitcoin. GBTC's premium is a result of the product's original uniqueness - it's a way to own bitcoin in your eTrade account without having to deal with cryptocurrency exchanges and esoteric wallets. As more people flooded into the industry and new alternatives emerged, that premium disappeared -- and then turned negative. But many smart market players have seen it through. "All arbitrage disappears after a certain point," said a trader and former colleague of Zhu's.

Davies is aware of the risk this poses to the Three Arrows, admitting during a September 2020 podcast episode produced by Castle Island that he expects the deal to fade. But before the show aired, Davis asked that the clip be removed; the company was obliged. Closing the position was a bit tricky—Three Arrows’ GBTC shares were locked up for six months at a time—but Zhu and Davis had an exit window sometime that fall. They didn't.

"They have ample opportunity to walk away with a bruise but not blow themselves up," Fauchier said. "I didn't think they'd be stupid enough to do it with their own money. I don't know what they're possessed by." ...it's obviously one of those trades where you want to be the first in, and you definitely don't want to be the last to get out." Now, Three Arrows colleagues say they're sticking with their positions in GBTC because they're betting on Note that the SEC will approve the long-awaited conversion of GBTC to an exchange-traded fund (ETF), which will greatly improve the fund's liquidity and tradability, and may eliminate Bitcoin price mismatches. (In June, the SEC rejected GBTC's application.)

By the spring of 2021, GBTC has fallen below its bitcoin value, and Three Arrows may now be losing money on its biggest trade yet. Still, cryptocurrencies endured a bull run that lasted into April, with Bitcoin hitting a record above $60,000 and Dogecoin (a cryptocurrency that started out as a joke) on an irrational rally fueled by Elon Musk Soaring. Zhu is also bullish on Dogecoin. Nansen was quoted as saying that 3AC's assets were around $10 billion at the time (although Nansen's CEO has now clarified that much of that amount was likely borrowed).

In retrospect, Three Arrows seems to have suffered a catastrophic loss later that summer—if a human loss, not an economic one. In August, two of the fund's minority partners retired simultaneously. Based in Hong Kong, the two partners routinely work 80 to 100 hours a week and manage most of 3AC's business. That leaves much of their work to Three Arrows' chief risk officer, Davies, who appears to be taking a more leisurely approach to watching the company's downside. “I think they used to manage risk much better,” said the former friend.

Around that time, there were signs that Three Arrows was facing a cash crunch. When a lender asks for collateral for the fund's margin trades, it typically pledges its stake in Deribit, rather than an easy-to-sell asset like bitcoin. Such illiquid assets are not ideal collateral. But there was another hurdle: Three Arrows owned shares in Deribit along with other investors who refused approval to use their shares as collateral. Apparently, 3AC is trying to pledge assets it doesn't have rights to - and trying to do so repeatedly, offering the same stake to various institutions, especially after Bitcoin starts to drop in late 2021. The company appears to have committed the same amount of locked GBTC to several lenders as well. “We suspect that Three Arrows is trying to pledge some collateral to multiple people at once,” said Bankman-Fried, FTX’s CEO. “I would be very surprised if that was all the misrepresentation here; Coincidence. I strongly suspect they do more than that."

Bear markets in cryptocurrencies often make any stock market action look like child's play. The crash was so severe that insiders called it a "crypto winter," and the season can last for years. By mid-January 2022, Three Arrows Capital found itself in a bad place to take it all. The GBTC position created a growing hole in 3AC’s balance sheet, with much of the firm’s money locked up in restricted shares of smaller cryptocurrency projects. Other arbitrage opportunities have dried up. In response, Three Arrows appears to have decided to take a riskier investment, hoping to make a fortune and put the company back on its feet. "What's driving them to change is just the obsession with returns," said one executive at a large lending company. "They might say, 'What if we went further?'"

In February, Three Arrows made its largest investment yet: $200 million in a popular token called luna. luna was founded by Do Kwon, a brash Korean developer and Stanford dropout whom Davis and Zhu had hooked up with in Singapore.

Around the same time, Zhu and Davis were planning to abandon Singapore. They have already moved some of the fund's legal infrastructure to the British Virgin Islands, and in April, Three Arrows announced it would be moving its headquarters to Dubai. That same month, Zhu and Davis bought two villas for about $30 million, one on Dubai's Crystal Lagoon in District 1, a man-made sea larger than anywhere else in the world, friends said. Sapphire Oasis. Zhu showed friends pictures of the adjoining mansions, telling them he bought the new seven-bedroom property from the Azerbaijani consul. roman columns of the fortress.

Then in early May, luna suddenly plummeted to near-zero levels, wiping out more than $40 billion in market value in a matter of days. Its value is pegged to a related stablecoin called terraUSD. When terraUSD failed to maintain its peg to the U.S. dollar, both currencies collapsed. According to Herbert Sim, a Singapore-based investor who tracks 3AC's wallet, Three Arrows' luna holdings, once worth about $5 billion, were suddenly worth just $604. As the death spiral unfolded, Blockchain.com’s head of lending, Scott Odell, reached out to the firm to find out the size of its luna business. After all, the loan agreement stipulated that Sanjian would notify the company if its overall drawdown rate reached at least 4%. 3AC’s top trader, Edward Zhao, replied, “As part of a portfolio, it’s not that big.” A few hours later, Odell notified Zhao that it needed to recoup its $270 million loan, according to a public message on Blockchain.com. and will accept payment in USD or stablecoins. Zhao looked caught off guard. "Yo...uh...um," he replied in their private chat.

Davis briefly assured him that everything was fine. He sent Blockchain.com a simple, one-sentence letter without a watermark, claiming that the company manages $2.387 billion in assets. Meanwhile, Three Arrows has made similar representations to at least six lenders. 3AC’s liquidators released a 1,157-page document that included Blockchain.com’s affidavit, which said it “now doubts the accuracy of this statement of net worth.”

Far from backing down, Davis threatened a few days later that he would "boycott" Blockchain.com if it recalled 3AC's loans. "Once that happens, we know something is wrong," said Lane Kasselman, Blockchain.com's chief business officer. In the offices of Three Arrows, the atmosphere has changed. According to a former employee, Zhu and Davis used to hold regular meetings on Zoom, but they stopped showing up that month, and then the managers stopped scheduling altogether.

In late May, Zhu tweeted what could also be his epitaph: "The supercycle price argument is wrong, sadly." Still, he and Davis acted calmly, as they Seemingly calling out every wealthy cryptocurrency investor they knew, asking to borrow large amounts of bitcoin, and offering the company's usual high interest rates. "They're clearly promoting themselves as a cryptocurrency hedge fund after they already know they're in trouble," said a person close to one of the largest lenders. In reality, Three Arrows was looking for funds just to pay off other lenders. "It's a trade-off," Castle Island's Walsh said. In mid-June, a month after luna’s debacle, Davis told Blockchain.com’s chief strategy officer, Charles McGarraugh, that he was trying to secure a 5,000 bitcoin loan from Genesis — worth about $125 million at the time — to provide to another investor. A lender to avoid liquidation.

But in practice, this financial chaos often leads to massive sell-offs by all involved to raise cash to stay solvent. The Three Arrows position was so large that it actually started affecting the broader cryptocurrency market: 3AC itself and other panicked investors were scrambling to sell and meet margin calls, which in turn pushed prices lower, creating a A vicious circle has formed. With 3AC and others unable to provide collateral, lenders demanded more collateral and dumped positions, sending Bitcoin and its peers toward multi-year lows. The crash grabbed headlines around the world as the total market capitalization of the cryptocurrency market fell below $1 trillion from a peak of $3 trillion in late 2021. McGarraugh said Davis told him, “If the crypto market continues to decline, 3AC will not be good.” That was the last time Blockchain.com spoke to Davis. After that, he and Zhu stopped answering their lenders, partners and friends.

Rumors of the company's imminent closure further fueled the cryptocurrency sell-off. On June 14, Zhu finally acknowledged the problem: “We are communicating with relevant parties and are fully committed to resolving this issue,” he tweeted. A few days later, Davis gave an interview to The Wall Street Journal in which he noted that he and Zhu remained “cryptocurrency believers,” but admitted, “We were very caught off guard by the terra-luna situation.”

Zhu started trying to sell at least one of his top-notch villas. At the same time, the company began moving funds. On June 14, the same day Zhu tweeted, 3AC sent nearly $32 million in stablecoins to the crypto wallet of an affiliated shell company in the Cayman Islands. "It is unclear where the funds subsequently went," the liquidators wrote in their affidavit. In the final days of Three Arrows, the partners contacted every wealthy crypto whale they knew to borrow more bitcoin, and crypto executives and investors from the U.S., the Caribbean, Europe to Singapore believe, 3AC found a willing lender of last resort among organized criminals. Owing a lot of money to these people would explain why Zhu and Davis went into hiding. This is also the type of lender you want to make up for before others, but you may have to move funds through the Cayman Islands. "They paid the mafia back," said the former trader and 3AC business partner, adding, "If you start borrowing money from these people, you must be very desperate."

After the crash, executives at cryptocurrency exchanges exchanged views. They were surprised to learn that Three Arrows had no short positions, which meant that the firm had stopped hedging—it was sticking to the cornerstone of its strategy. "It's easy to do," said the leading lending executive, "without any trading desk knowing you're doing it." Investors and exchange executives now estimate that 3AC will be leveraged at about 100% of its assets by the end of the year. three times, but some suspect it could be higher.

Three Arrows appears to have put all of the money in hybrid accounts -- unbeknownst to the owners of the funds -- and has taken each sum to pay back lenders. "They probably managed the whole thing on an Excel sheet," Walsh said. This means that when 3AC ignored margin calls and withheld lenders in mid-June, those lenders, including FTX and Genesis, liquidated their accounts, unaware that they were also selling assets belonging to 3AC's partners and clients. (This appears to be what happened to 8 Blocks Capital, which complained on Twitter in June that $1 million in its trading account with 3AC had suddenly disappeared.)

After the company’s traders stopped responding to messages, lenders tried calling, emailing and messaging them on every platform, even reaching out to their friends and stopping by their homes before liquidating their collateral. Some peered through the doors of 3AC's Singapore office, where weeks of mail had been piling up on the floor. Just a few weeks ago, those who counted Zhu and Davis as close friends and lent them money — even $200,000 or more — without hearing anything about the fund’s troubles were outraged and frustrated. betray. "They were definitely sociopaths," said a former friend. "The numbers they reported in May were very, very wrong," Casselman said. "We strongly believe they committed fraud. There's no other way to say it -- it's fraud, they lied." Genesis Global Trading, which lent the most to Three Arrows, has filed a $1.2 billion claim. Others lent them billions more, much of it in bitcoin and ethereum. Liquidators have only recovered $40 million in assets so far. "It's clear that they're insolvent and they're continuing to borrow, which looks like a classic Ponzi scheme," Casselman said. "The comparison between them and Bernie Madoff isn't that far off."

It was more or less a formality when Three Arrows filed for foreign corporate bankruptcy proceedings — Chapter 15 — in the Southern District of New York on July 1. But the document itself contains some surprises. While creditors were rushing to file for compensation, 3AC's founders were already ahead: first in line were Zhu himself, who filed a $5 million claim on June 26, and Davis' wife Kelly Kaili Chen, who claims she lent nearly $66 million to the fund. The only documentation they need to substantiate their claims is a simple self-certification that does not say when the loan was made or what the funds were used for. "It's a total mouse operation," Walsh said. While insiders were unaware of Chen's involvement with the company, they assumed she must have been acting on behalf of Davis; her name appeared on various corporate entities, possibly for tax reasons. Zhu's mother and Davis' mother also filed claims, according to people familiar with the matter.

Since the company filed for bankruptcy, liquidators hadn't been in touch with Zhu and Davis until press time, and their whereabouts are still unknown, according to people familiar with the matter. The co-founders have received death threats, their lawyers said. During an awkward Zoom conference call on July 8, participants using the usernames of Zhu and Davis logged on with their cameras turned off, refusing to unmute even as the BVI liquidators informed their The avatar poses dozens of questions.

Authorities are also scrutinizing Sanjian. The Monetary Authority of Singapore, which has already been reprimanded for providing "false or misleading" information, is investigating whether 3AC has "further breached" its regulations. In the U.S., all of Three Arrows' court filings are now copying what SEC enforcement lawyers have done.

On July 21, Zhu and Davis were interviewed by Bloomberg "from an undisclosed location." The interview was unusual for several reasons — Zhu protested media coverage of his profligate lifestyle, saying he cycled to work, avoided clubs, and “only had two houses in Singapore” — but also Because the partners blamed the collapse of 3AC on their failure to foresee that the cryptocurrency market might fall. Neither says the word hyperloop, but the reference is clear enough. "We positioned ourselves in a market that didn't end up happening," Zhu said, while Davis added, "In good times, we do best. In bad times, we lose the most."

The pair also told Bloomberg that they planned to travel to Dubai "soon." Their friends said they were already there. The oasis offers a particular advantage, lawyers say: Dubai has no extradition treaty with Singapore or the United States.