As a reminder, the problems of the crypto fund in question came to light on June 17. That’s when sources reported that 3AC’s positions had been liquidated by FTX, Deribit and BitMEX platforms. In other words, the fund’s management was using borrowed funds for trading positions in the market, and the collapse of Bitcoin to 20,000 led to the loss of the used funds.

News about the liquidation of 3AC crypto fund trading positions

The situation hasn’t improved since then, and it ended up with an order to liquidate the company. A court in the British Virgin Islands issued an order to that effect at the end of June.

What leads to bankruptcy in the cryptocurrency world?

Zhu and Davies attributed the rapid collapse of 3AC to overly optimistic assumptions about the market outlook on their part. In doing so, Zhu noted that they “positioned themselves for the kind of market that ultimately failed to take shape”. Ultimately, the collapse of the fund could have been predicted, as Zhu himself allegedly foresaw it shortly before the event itself.

So, the three problems that “sunk” Three Arrows Capital were Terra LUNA’s too large a share of the portfolio, the presence of ETH in the stack and Grayscale’s Bitcoin trust. In Terra’s case, Zhu initially saw no preconditions for any problems. Here’s his rejoinder.

We didn’t realise that the Luna token could drop to zero in a matter of days, and that this would be a catalyst for loan liquidation across the industry, which would put significant pressure on all our illiquid positions.

Crypto fund co-founder Su Zhu

As a reminder, the Terra project almost completely collapsed two months ago, which has indeed put significant pressure on the entire crypto market. Incidentally, project founder Do Kwon was personally acquainted with Soo Joo, with the latter initially not finding him to be someone not worth trusting. Here’s a quote.

We met Do Kwon when he moved to Singapore. And we just felt that the project was going to do some really big things, and had already done a lot.

Terra founder Do Kwon

According to Decrypt’s sources, the second problem was the stacking of Etherium, for which the crypto fund received tokens with the equivalent value of stETH. In theory, each stETH could have been exchanged for one ETH once the altcoin network switched to the Proof-of-Stake (PoS) consensus mechanism. However, one of the consequences of Terra’s collapse was that stETH began to lose its link to the price of ETH.

As the Terra collapse undermined confidence in parity of any kind, many traders began to “hunt” for staking positions. Thus, the entire industry was as if effectively trying to capitalise on the artificially inflated deviation in the value of stETH.

Loss of stETH parity to ETH

Zhu also attributed the collapse of 3AC to the impact of Bitcoin trust Grayscale. Recall, this is an investment product for large market players that allows them to buy stakes worth 1/1000 close to the market price of Bitcoin. The problem is that due to the general market crash, Grayscale units were trading at a significant discount to the real BTC price, which also caused huge losses for Three Arrows Capital.

Another popular question for Zhu and Davis is where and why have they been hiding all this time? Here’s Su’s answer.

Kyle and I know that there are a lot of crazy people in the cryptosphere who make death threats or create this kind of information noise. We think it’s in everyone’s best interest if we can be physically protected and not draw attention to ourselves.

The physical presence of the co-founders of Three Arrows Capital is now very important – previously the asset liquidators in the fund’s bankruptcy case complained about Zhu and Davies’ absence from the public space, which made the whole process move very slowly. Now that they have finally been in touch, we can assume that the lawyers will be able to recover at least some of the losses of the investors in the fund.


We believe that the liquidation of Three Arrows Capital will remain a major event for the cryptocurrency market in 2022. Until a few months ago, no one would have guessed that 3AC would eventually become part of history, as the fund had plenty of money. However, the reality is that predicting the course of events in the coin market is trivial. Therefore, one should also be careful with investments.

What do you think about it? Share your opinion in our millionaires’ cryptochat. There we will talk about other important topics regarding the market.