The Crypto Geniuses Who Vaporized a Trillion Dollars

In February, Three Arrows took one of its biggest swings yet: It put $200 million into a buzzy token called luna, which was founded by a brash, alluring South Korean developer and Stanford dropout named Do Kwon, with whom Davies and Zhu had been hanging out in Singapore.

Around the same time, Zhu and Davies were making plans to abandon Singapore. They’d already moved some of the fund’s legal infrastructure to the British Virgin Islands, and in April, Three Arrows announced it would move its headquarters to Dubai. That same month, friends say, Zhu and Davies purchased two villas for roughly $30 million combined, one next to the other on Dubai’s Crystal Lagoon in District One, a manmade aquamarine oasis larger than any other in the world. Showing photos of the side-by-side mansions, Zhu told friends he had purchased his new seven-bedroom property — a 17,000-square-foot compound that looks like a fortress with hedge-lined fences and imposing Roman columns — from the consul of Azerbaijan.

Then in early May, luna suddenly collapsed to near zero, wiping out more than $40 billion in market cap in a matter of days. Its value was tied to an associated stablecoin called terraUSD. When terraUSD failed to maintain its dollar peg, both currencies collapsed. Three Arrows’ holdings in luna, once roughly half a billion dollars, were suddenly worth only $604, according to a Singapore-based investor named Herbert Sim who was tracking 3AC’s wallets. As the death spiral unfolded, Scott Odell, a lending executive at Blockchain.com, reached out to the firm to check in about the size of its luna hit; after all, the loan agreement stipulated that Three Arrows notify the company if it experienced an overall drawdown of at least 4 percent. “Was not that big as part of portfolio holdings anyway,” 3AC’s top trader, Edward Zhao, wrote back, according to messages made public by Blockchain.com. A few hours later, Odell informed Zhao that it would need to call back a significant portion of its $270 million loan and would take payment in dollars or stablecoins. Zhao appeared caught off guard. “Yo … uhh … hmm,” he replied in their private chat.

The next day, Odell reached out to Davies directly, who tersely reassured him that everything was fine. He sent Blockchain.com a simple, one-sentence letter with no watermark, asserting that the firm had $2.387 billion under management. Meanwhile, Three Arrows was making similar representations to at least half a dozen lenders. Blockchain.com is “now doubtful that this net asset value statement was accurate,” according to its affidavit, which was included in a 1,157-page document released by 3AC’s liquidators.

Rather than back down, a few days later Davies threatened to “boycott” Blockchain.com if it called back 3AC’s loans. “Once that happened, we knew something was wrong,” says Lane Kasselman, chief business officer of Blockchain.com. Inside the Three Arrows office, the mood had changed. Zhu and Davies used to hold regular pitch meetings on Zoom, but that month, they stopped showing up, then managers stopped scheduling them altogether, according to a former employee.

In late May, Zhu sent out a tweet that may as well be his epitaph: “Supercycle price thesis was regrettably wrong.” Still, he and Davies played it cool as they called up seemingly every wealthy crypto investor they knew, asking to borrow large quantities of bitcoin and offering the same hefty interest rates the firm always had. “They were clearly pumping their prowess as a crypto hedge fund after they already knew they were in trouble,” says someone close to one of the biggest lenders. In reality, Three Arrows was scrounging for funds just to pay its other lenders back. “It was robbing Peter to pay Paul,” says Castle Island’s Walsh. In the middle of June, a month after luna’s collapse, Davies told Charles McGarraugh, chief strategy officer at Blockchain.com, that he was trying to get a 5,000 bitcoin loan — then worth about $125 million — from Genesis to give to yet another lender to avoid liquidating its positions.