Three Arrows Capital

Three Arrows Capital was founded in 2012 by Su Zhu and Kyle Davies, who first met as students at Phillips Academy and later attended Columbia University. Originally an arbitrage shop trading foreign-exchange derivatives, the firm pivoted hard into cryptocurrency and rode the bull markets of 2020 and 2021 to become one of the most prominent and influential funds in the space. Zhu in particular became a widely followed market commentator, and 3AC's reputation gave it access to enormous amounts of credit. Lenders across the industry extended it billions of dollars on lightly collateralized or uncollateralized terms, treating the fund as a blue-chip counterparty.

At its height the fund's last public statement claimed a net asset value of $18 billion, and analytics firm Nansen estimated it held roughly $10 billion in crypto assets by March 2022. But the book was dangerously concentrated and leveraged. 3AC held almost 39 million units of the Grayscale Bitcoin Trust (GBTC) at the end of 2020, a position that turned toxic as GBTC swung to a steep discount to its underlying bitcoin, trading about 34% below NAV by mid-June 2022. It was similarly underwater on staked ether (stETH), and in February 2022 it put roughly $200 million into Terra's LUNA token. The firm borrowed billions to fund these trades, leaving almost no margin for error.

In May 2022 the Terra ecosystem imploded, with the LUNA token and its UST stablecoin collapsing to near zero. 3AC's roughly $200 million LUNA stake was wiped out. On its own that loss might have been survivable, but the fund was already deeply underwater on GBTC and stETH as the wider market fell. The losses triggered margin calls the fund could not meet. Across 2021 and 2022 Three Arrows lost in excess of $4.2 billion, one of the largest hedge-fund trading losses on record, and by mid-June 2022 it was reportedly facing at least $400 million in liquidations as lenders moved to recover collateral.