This article comes fromBloomberg, original author: Joanna Ossinger, Muyao Shen, and Yueqi Yang

Odaily Translator |

Odaily Translator |

After five weeks in hiding, Three Arrows founders Su Zhu and Kyle Davies spoke to Bloomberg from an undisclosed location.

They talked a lot of inside information and regretted this crypto journey. They admitted that the risk management of Sanjian Capital had systematically failed, and credit liquidity was greatly affected due to wrong bets. The pair declined to say where they were, but a lawyer on the call said their final destination was the United Arab Emirates.

En route to Dubai, the pair described it as a "regrettable breakdown".

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When Excessive Leverage Meets Crypto Winter

Recently, a court in the British Virgin Islands ordered the liquidation of cryptocurrency hedge fund Three Arrows Capital, saying they were owed more than $2.8 billion in unsecured claims. That number is expected to rise significantly, court documents show. The liquidators overseeing the bankruptcy have so far taken control of assets worth at least $40 million.Su Zhu and Kyle Davies have long been the most well-known cryptocurrency bulls, but under the impetus of leverage, they gradually put Three Arrows Capital in the "center of the thunderbolt". As cryptocurrencies crash, Three Arrows Capital is in trouble. Su Zhu said: "We position ourselves in a market that will not eventually crash," adding Kyle Davies: "We stubbornly believe that the crypto market will always be good, and we have all of our, almost all assets. Then,”

In good times we do our best, but in bad times we lose the most.

At the same time, Su Zhu and Kyle Davies believe that they are not alone in the market. Bad market conditions, correlated one-way bets and loose lending strategies have led to the bankruptcy of companies such as Celsius Network, Voyager Digital and BlockFi.

Su Zhu said: "It's not just us, companies like Celsius have problems, it's not surprising, we have our own capital, we have our own balance sheet, but we also take deposits from these lenders, and then we create for them Yield. So if we’re in the business of taking deposits and then generating yield, you know, that means we end up doing something like that.”

Obviously, Su Zhu and Kyle Davies are shirking responsibility, you know, they have vigorously advocated encrypted assets before.

"We've never spent a lot of money at any club. You know, we've never seen me drive a Ferrari and a Lamborghini, and I feel like this smearing of us is just from the classic script, you know, when that kind of thing happens, These are the headlines people like to read when there is a thunderbolt."

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The "tragedy" caused by Luna

Su Zhu and Kyle Davies, who admitted that trading Luna and the now-defunct algorithmic stablecoin UST cost them significant losses, confessed to being surprised by the speed at which LUNA collapsed. Su Zhu explained:

"What we didn't realize was that Luna would be able to go to almost zero in a matter of days, which would trigger a credit crunch across the industry and would also put enormous pressure on all of our illiquid positions. Do Kwon, the founder of , was too close."

"When Do Kwon moved to Singapore, we started to know him first-hand. And we just thought the project would do something really big, and it was already doing well." Su Zhu admits that he misjudged LUNA, "LUNA initially It's doing so well, you know, so big, so fast. It's very much like a long-term capital management opportunity for us, other people have these kinds of deals, we all think it's good, LUNA is growing too Soon."

“One of the transactions” involved stETH — designed to unleash the liquidity of staked ETH and widely used in DeFi. Once the long-awaited upgrade of the Ethereum blockchain takes effect, each stETH can be exchanged for one ETH, but the turmoil caused by Terra's collapse caused its market value to fall below normal levels, and other investors are also selling for risk control.

Su Zhu further said: "Luna just had an accident, very much like an epidemic, people will say, well, is there anyone who is also using long-term pledged ETH, instead of being liquidated ETH as the market drops? The whole industry is looking These positions worked, but in the end these guys were all hunted."

Still, Three Arrows was able to continue borrowing from big digital asset lenders and wealthy investors in the early days of the market crisis — until they blew themselves up.

Following Luna’s bankruptcy, Su Zhu said the lenders were “satisfied” with Three Arrows’ financial situation and even allowed them to continue the deal “as if nothing was wrong” — many of which, as court documents now show, required only Very small amount of collateral."So I just think, during that time, we continue to do business as usual. But,If we got more in the game, we'd see the credit market itself being a cycle where, you know, we might not be able to get extra credit when we need it. "

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"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 invested in their fund. For a while, GBTC was one of the few U.S.-regulated crypto offerings, so it had its own market, and was so popular that it consistently traded above the value of its Bitcoin holdings on the secondary market.

Grayscale, on the other hand, allows large investors like Three Arrows to buy shares directly by handing them Bitcoin, and these GBTC holders can then sell their holdings to the secondary market. That premium means any sale could turn a tidy profit for big investors. The last document submitted to regulators at the end of 2020 showed that Three Arrows Capital was the largest holder of GBTC, with a position worth $1 billion at the time.

Part of the reason for investing in GBTC, as Su Zhu and Kyle Davies tell it, was their herd mentality: “The profits were huge, we managed to do it in the right window, and then like everyone else, we started losing money, and It turned negative. Our trust was discounted, and the discount was far greater than anyone could have imagined."

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Risk-free return? nonexistent!

There is never an investment without risk.

When answering "What's wrong with Three Arrows Capital", Su Zhu said that years of bull market made him overconfident in the market. This kind of bull market not only injected into his and Kyle Davies' thinking, but also injected into almost all the crypto industry. Each credit infrastructure service provider.

Su Zhu said: "You always need to know something about the field you are entering - when you choose to invest, you need to distinguish whether this company is risky or not. For us, if you visit our website, we always have a lot of information about Disclaimer of crypto risks, we have never presented ourselves as risk-free.”

When the crypto market first started to slide in May, he said, “we met all the margin calls, so we felt like people should understand that there was a risk. When we do well, the lenders benefit a lot and they can say , look, I’m making $200 million a year in lending at Three Arrows, a 10x return. Now, it’s the complete opposite.”

Currently, Su Zhu and Kyle Davies are on their way to Dubai, and Su Zhu hopes to take it step by step and liquidate through his private assets. Su Zhu revealed that some people in the encryption industry even issued death threats to them, so now they want to be safe and keep a low profile, "this is good for everyone."