How Encryption Geniuses Vaporized One Trillion Dollars

In 2022, the cryptocurrency market suffered a severe blow, with digital assets like Bitcoin plummeting over 70%, resulting in more than one trillion dollars in market value evaporating. The main driver behind this crash was a Singapore-based hedge fund called Three Arrows Capital(, abbreviated as 3AC).

3AC was founded in 2012 by two young genius traders, Su Zhu and Kyle Davies. They met at Andover High School and Columbia University, and after graduation, they worked in investment banks on Wall Street. Su Zhu graduated a year early with excellent grades, and after working at Credit Suisse and Deutsche Bank, he joined the high-frequency trading firm Flow Traders. There, he mastered the essence of arbitrage trading and became one of the top traders in terms of profitability at the firm.

In 2012, Su Zhu and Davies raised about 1 million USD to establish 3AC. The company initially focused on arbitrage in foreign exchange derivatives in emerging markets, later shifting to cryptocurrency trading. With the surge of digital assets like Bitcoin at the end of 2017, 3AC began to borrow heavily and invest with leverage. By the end of 2020, the assets managed by the fund had exceeded 2.6 billion USD, with liabilities of 1.9 billion USD.

One of 3AC's largest bets is the Grayscale Bitcoin Trust ( GBTC ). When GBTC traded at a price higher than Bitcoin, 3AC profited significantly through arbitrage. However, starting in early 2021, GBTC began to trade at a discount, causing huge losses for 3AC.

Nevertheless, 3AC continued to leverage its investments. In February 2022, the fund invested $200 million in the popular token Luna. By early May, Luna plummeted to nearly zero, and 3AC's $5 billion investment in it almost entirely evaporated. This triggered a series of chain reactions, leading to 3AC's insolvency.

In mid-June, 3AC began to ignore margin call notices, and Su Zhu and Davies lost contact with the outside world. Major lending institutions started to liquidate 3AC's positions, further exacerbating the cryptocurrency sell-off. On July 1, 3AC filed for bankruptcy protection in New York, owing at least $2.8 billion.

The subsequent investigation revealed that 3AC had no hedging risk at all, with a leverage ratio exceeding 3 times. The company mixed client funds, personal funds, and loans all together, using one account to repay the debts of another account. Many people believe this is a typical Ponzi scheme.

Su Zhu and Davies are currently missing and are believed to have fled to Dubai. Their rise and fall showcase the madness and fragility of the encryption industry. This storm has not only destroyed a hedge fund but has also severely impacted the entire encryption ecosystem, with effects that may last for years.