the money game

Another Big Crypto Player 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 around what would be the next big thing to implode. Those two digital currencies, TerraUSD and Luna, had been part of the firmament of the crypto landscape, since their creator, Do Kwon, lured more than $60 billion from hedge funds and individuals alike with the promise of 18 percent yields and stable earnings — two promises that, in retrospect, are mutually contradictory. The fallout continued for weeks, and then, on Tuesday, the CEO of one of the big crypto-investment funds that had helped prop up Kwon’s empire, Three Arrows Capital, made a gnomic remark himself 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 recent days one of the most prominent and highly regarded players in the space, is either dead or on life support. In an interview with The Wall Street Journal, Su Zhu and 3AC’s co-founder Kyle Davies confirmed that the fund is looking for a larger fund to bail it out. “We were not the first to get hit … This has been all part of the same contagion that has affected many other firms,” Davies told the paper.

The fund can trace its beginnings back to Phillips Academy Andover, the elite private Massachusetts high school where Zhu and Davies first met. From there, the two friends went to Columbia, and then both worked for Credit Suisse for brief spells before starting the fund in 2012. Along the way, they made some large bets in crypto investments that ended up fizzling out (though it’s unclear how much of a hit they ended up taking). But like everything else in the crypto world, there was a ton of very niche and fervent marketing to promote the whole endeavor. Zhu appears to have been happy to court an online following, starting an investment podcast, playing chess on Twitch against one of the game’s biggest online stars, and even posting thirst traps to document his “fitness journey.”

The Journal piece answers some basic questions around 3AC, but ultimately leaves open many more questions about its total footprint. Zhu’s fund had invested $200 million into Luna tokens, meaning that it would have been one of the largest investors in a $1 billion round that helped propel the now-defunct cryptocurrency’s skyrocketing popularity earlier this year. (More details about the terms of the deal weren’t disclosed.) The Journal also says that the fund had roughly $3 billion in assets in April, prior to the collapse, but it’s unclear how leveraged the fund was and the extent to which it can meet its obligations. A report from crypto news site the Block shows that 3AC is already failing to pay back its creditors.

One of the things about this particular boom-and-bust cycle with crypto is how the industry has been trying to remake traditional finance and ends up running into the same problems as the “TradFi” world. The reasons behind this bust are as simple and analog as any old-fashioned bank run. Danny Yuan, the CEO of Hong Kong trading firm 8 Blocks Capital, posted a thread on Twitter explaining how 3AC allegedly broke a trading arrangement between the firms and dipped into an account it shouldn’t have. (I reached out to Davies and Zhu but haven’t heard back.)

The news around 3AC’s apparent insolvency could hardly have come at a worse time. Crypto tends to be extra volatile on weekends, since there are so few people trading. In the U.S., with Father’s Day and Juneteenth coming up back-to-back, that’s likely to make the markets even more crash-prone than usual. All this is likely bad news for Davies and Zhu if they’re trying to off-load their fund. Any buyer out there who’s looking to pick the meat off the bones might be better off waiting a few days to get it on even more of a discount.

Another Big Crypto Player Just Blew Up