Three Arrows Capital Founders Reveal Reasons Behind Downfall

• Overexposure to Terra, staked Ethereum, and Grayscale’s Bitcoin trust are blamed.
• Zhu said that when it came to Terra, he originally saw no warning signs.

A Bloomberg interview with Su Zhu and Kyle Davies, the two co-founders of the recently collapsed crypto hedge firm Three Arrows Capital (3AC), has broken their silence. As Zhu puts it, they “positioned [themselves] for a kind of market that didn’t end up happening,” the swift demise of 3AC can be traced back to their own too optimistic forecasts. As Davies reiterated, “we believed in everything to the fullest.”

Boils Down to Terra Collapse

Zhu claimed it was “not a surprise” that 3AC, Celsius, and Voyager all went bankrupt in their extended postmortem. There was a crypto winter, and not just for them. Companies like Vauld and BlockFi have been suffering liquidity concerns while the big names—such as Coinbase, Gemini and OpenSea—have announced massive layoffs in their workforces.

Zhu made the following statement:

“We have our own capital, we have our own balance sheet, but then we also take in deposits from these lenders and then we generate yield on them. So if we’re in the business of taking in deposits and then generating yield, then that, you know, means we end up doing similar trades.”

Overexposure to Terra, staked Ethereum, and Grayscale’s Bitcoin trust are blamed by Su Zhu and Kyle Davies for the collapse of 3AC. Zhu said that when it came to Terra, he originally saw no warning signs.

Zhu Added:

“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.”

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