The Crypto Geniuses Who Vaporized a Trillion Dollars
In practice, though, this kind of financial mess tends to create a whole lot of selling by everyone involved to raise cash in an effort to stay solvent. Three Arrows’ position was so large that it effectively began to tank the broader crypto markets: All the scrambling to sell and meet margin calls, by 3AC itself and other panicky investors, in turn pushed prices down lower, creating a vicious cycle. The declines set off further declines as lenders demanded even more collateral and sold positions when 3AC and others couldn’t post it, sending bitcoin and its peers toward multi-year lows. The crash generated headlines around the world as the overall value of the crypto markets made its way below $1 trillion from a peak of $3 trillion in late 2021. McGarraugh says Davies told him that “if the crypto market continued to decline, 3AC would not be okay.” That was the last time anyone at Blockchain.com spoke to Davies. After that, he and Zhu stopped answering their lenders, partners, and friends.
Rumors that the firm was collapsing seized Twitter, further fueling the larger crypto sell-off. On June 14, Zhu finally acknowledged the trouble: “We are in the process of communicating with relevant parties and fully committed to working this out,” he tweeted. A few days later, Davies gave an interview to The Wall Street Journal in which he noted he and Zhu were still “believers in crypto” but admitted, “The terra-luna situation caught us very much off guard.”
Zhu started trying to get rid of at least one of his good-class bungalows; at the same time, the firm started moving its money around. On June 14, the same day Zhu posted his tweet, 3AC sent nearly $32 million in stablecoins to a crypto wallet belonging to an affiliated shell company in the Cayman Islands. “It was unclear where those funds subsequently went,” the liquidators wrote in their affidavit. But there is a working theory. In Three Arrows’ final days, the partners reached out to every wealthy crypto whale they knew to borrow more bitcoin, and top crypto executives and investors — from the U.S. to the Caribbean to Europe to Singapore — believe 3AC found willing lenders of last resort among organized-crime figures. Owing such characters large sums of money could explain why Zhu and Davies have gone into hiding. These are also the kinds of lenders you want to make whole before anyone else, but you may have to route the money through the Caymans. Says the former trader and 3AC business partner, “They paid the Mafia back,” adding, “If you start borrowing from these guys, you must be really desperate.”
After the collapse, executives at crypto exchanges began comparing notes. They were surprised to learn that Three Arrows had no short positions, which is to say it had stopped hedging — the very thing it had maintained was the cornerstone of its strategy. “It’s very easy to do that,” says the major lending executive, “without any of the trading desks knowing you’re doing that.” Investors and exchange executives now estimate that, by the end, 3AC was leveraged around three times its assets, but some suspect it could be magnitudes more.
Three Arrows seems to have kept all the money in commingled accounts — unbeknownst to the owners of those funds — taking from every pot to pay back lenders. “They were probably managing this whole thing on an Excel sheet,” says Walsh. That meant that when 3AC ignored margin calls and ghosted lenders in mid-June, those lenders, including FTX and Genesis, liquidated their accounts, not realizing they were also selling assets that belonged to 3AC’s partners and clients. (This seems to be what happened with 8 Blocks Capital, which complained on Twitter in June that $1 million from its trading account with 3AC had suddenly disappeared.)