The Crypto Geniuses Who Vaporized a Trillion Dollars
During this early phase, Three Arrows Capital focused on a niche market: arbitraging emerging-market foreign-exchange (or “FX”) derivatives — financial products tied to the future price of smaller currencies (the Thai baht or the Indonesian rupiah, for instance). Access to those markets depends on having strong trading relationships with big banks, and getting in the door was “almost impossible,” BitMEX’s Hayes wrote recently in a Medium post. “When Su and Kyle told me how they got started, I was pretty impressed they had hustled their way into this lucrative market.”
At the time, FX trading was moving to electronic platforms, and it was easy to find differences, or spreads, between the prices quoted at different banks. Three Arrows found its sweet spot trolling the listings for mispricings and “picking them off,” as Wall Street calls it, often pocketing just fractions of a cent on each dollar traded. It was a strategy the banks detested — Zhu and Davies were essentially scooping up money these institutions would otherwise keep. Sometimes, when banks realized they’d quoted Three Arrows the wrong price, they would ask to amend or cancel the trade, but Zhu and Davies wouldn’t budge. Last year, Zhu tweeted out a 2012 photo of himself smiling while sitting in front of 11 screens. Seemingly making a reference to their FX-trading strategy of picking off banks’ bids, he wrote, “You haven’t lived until you’ve hit five dealers on the same quote at 230am.”
By 2017, the banks began cutting them off. “Whenever Three Arrows requested a price, all the bank FX traders were like, ‘Fuck these guys, I’m not going to price them,’ ” says a former trader who was a counterparty to 3AC. Lately, a joke has been going around among FX traders who knew Three Arrows in its early days and watched it collapse with a bit of Schadenfreude. “We FX traders are partly to blame for this because we knew for a fact that these guys were not able to make money in FX,” says the former trader. “But then when they came to crypto, everyone thought they were geniuses.”
On May 5, 2021, with Three Arrows at the height of its fortunes, Zhu tweeted a 2012 photo of the firm in its earliest days, when he and Davies traded foreign currencies out of a two-bedroom apartment. Implicit in the tweet was a message: Think how good we must be to have built a multibillion-dollar firm from such humble beginnings. Photo: Su Zhu/Twitter
Abasic thing to know about crypto is that, so far anyway, it has been subject to a progression of extreme but roughly regular boom-and-bust cycles. In the 13-year history of bitcoin, the 2018 bear market was a particularly painful one. After reaching a record high of $20,000 in late 2017, the cryptocurrency crashed to $3,000, dragging with it thousands of smaller coins in the market. It was against this backdrop that Three Arrows switched its focus to crypto, starting to invest at such an opportune time that Zhu was often credited (which is to say, he took credit) for calling the bottom of the cycle. In later years, it looked like brilliance to many impressionable crypto noobs — and even industry insiders — who followed Zhu and Davies on Twitter. But the timing might have just been luck; after all, Three Arrows was looking for a new racket.