Three Arrows Capital Founders Cite 3 Key Crypto Trades That Blew Up the Firm
The founders and partners of crypto hedge fund Three Arrows Capital, which filed for bankruptcy earlier this month, have broken their silence on just how they lost billions of dollars they borrowed from other firms. From a report: Su Zhu and Kyle Davies attribute 3AC's collapse to over-exposure to Terra, staked Ethereum, and Grayscale's Bitcoin trust. Zhu said in the case of Terra, he initially didn't see any red flags: "What we failed to realize was that Luna was capable of falling to effective zero in a matter of days and that this would catalyze a credit squeeze across the industry that would put significant pressure on all of our illiquid positions." "We began to know Do Kwon on a personal basis as he moved to Singapore," said Zhu. "And we just felt like the project was going to do very big things, and had already done very big things. If we could have seen that, you know, that this was now like, potentially like attackable in some ways, and that it had grown too, you know, too big, too fast." Another popular trade among the ailing crypto companies was staked Ethereum, or stETH. Every stETH will in theory be redeemable for one Ethereum after the network migrates to a proof-of-stake (PoS) consensus mechanism in September. However, one of the knock-on effects of Terra's collapse was that stETH began to miss its peg. This attracted opportunistic traders to bet against the token: "Because Luna just happened, it was very much a contagion where people were like, 'OK, are there people who are also leveraged long staked Ether versus Ether who will get liquidated as the market goes down?' So the whole industry kind of effectively hunted these positions, thinking that, you know, that because it could be hunted essentially." Zhu also attributed 3AC's collapse to exposure to Grayscale's Bitcoin Trust (GBTC), an investment product for institutional investors who want exposure to Bitcoin without the risks of directly holding it. GBTC is currently trading at a 30% discount to BTC.
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