The Crypto Geniuses Who Vaporized a Trillion Dollars

With cryptocurrencies trading on exchanges around the world, the firm’s experience with arbitrage came in handy right away. One famous trading strategy was known as the “kimchee premium” — it involved buying bitcoin in, say, the U.S. or China and selling it at a higher price in South Korea, where the exchanges were more tightly regulated, resulting in higher prices. At that time, winning trade setups like this were plentiful and profitable. They were the bread and butter of Three Arrows Capital, which told investors it practiced low-risk strategies designed to make money in both bullish and bearish times.

Another crypto arbitrage might involve buying bitcoin at its current (or “spot”) price while selling bitcoin futures, or vice versa, in order to harvest a price premium. “The Fund’s investment objective is to achieve consistent market neutral returns while preserving capital,” 3AC’s official documents read. Investing in a way that involves a limited downside no matter what the broader market is doing is, of course, known as “hedging” (where hedge funds get their name). But hedged strategies tend to spin off the most money when executed at scale, so Three Arrows began borrowing money and putting it to work. If all went well, it could generate profits that more than covered the interest it owed on the loan. Then it would do it all over again, continuing to grow its pool of investments, which would allow it to borrow even larger sums.

Beyond heavy borrowing, the firm’s growth strategy depended on another scheme: building lots of social-media clout for the two founders. In crypto, the only social-media platform that counts is Twitter. Many key figures in what has become a global industry are anonymous or pseudo-anonymous Twitter accounts with goofy cartoon profile images. In an unregulated space without legacy institutions and with global markets trading 24/7, Crypto Twitter is the center of the arena, the clearinghouse for the news and views that move markets.

Zhu — and to a lesser extent Davies — earned his way into the elite upper tier of Crypto Twitter. According to friends, Zhu had a conscious plan to become a “Twitter celebrity”: It entailed tweeting a lot, pandering to the crypto masses with outrageously bullish prognostications, racking up a huge number of followers, and, in turn, becoming an apex predator on Crypto Twitter, profiting at the expense of everyone else.

Zhu gained his 570,000-strong following in part by promoting his theory of a cryptocurrency “supercycle” — the idea of a yearslong bull market for bitcoin with prices rising well into the millions of dollars per coin. “As crypto supercycle continues, there will be more and more people trying to larp how early they were,” Zhu tweeted last year. “Only thing that matters is how many coins you have now. Either you own the % of the key networks you should or you don’t. Being early and low conviction is gross tbh.” And: “As the supercycle continues, buttsore mainstream media will try to talk about how the early whales own everything. The richest ppl in crypto now had near-zero net worth in 2019. I know ppl who unironically say if someone had lent them $50k more back then theyd have $500m more now.” Zhu hammered the point constantly on the platform and in his appearances on crypto podcasts and video shows: Buy, buy, buy now, and the supercycle will make you insanely rich someday.

“They used to boast that they can borrow as much money as they want,” says the former trader who knew them in Singapore. “This was all planned, man, from the way they established credibility to the way the fund was structured.”These guys were not able to make money in FX. But then when they came to crypto, everyone thought they were geniuses.

As it grew, Three Arrows branched out beyond bitcoin into a slew of start-up crypto projects and more obscure cryptocurrencies (sometimes called “shitcoins”). The firm seemed rather indiscriminate about these bets, almost as if it viewed them as a charity. Earlier this year, Davies tweeted that “it doesn’t matter specifically what a VC invests in, more fiat in the system is good for the industry.” Says Chris Burniske, a founding partner of VC firm Placeholder, “They were clearly spray and pray.”

A number of investors remember having their first sense that something might be off with Three Arrows in 2019. That year, the fund began reaching out to industry peers with what it described as a rare opportunity. 3AC had invested in a crypto options exchange called Deribit, and it was selling off a stake; the term sheet set the value of Deribit at $700 million. But some investors noticed the valuation seemed off — and discovered its actual valuation was just $280 million. Three Arrows, it turned out, was attempting to flip a portion of its investment at a steep markup, essentially netting the fund an enormous kickback. It was a sketchy thing to do in venture cassssssssssssssssssssssssssssssss -zpital, and it blindsided the outside investors, along with Deribit itself. Says David Fauchier, a portfolio manager at Nickel Digital Asset Management who received the pitch, “Since then, I’ve basically stayed away from them, held them in very low regard, and never wanted to do business with them.”

But the firm was thriving. During the pandemic, as the Federal Reserve pumped money into the economy and the U.S. government sent out stimulus checks, cryptocurrency markets rose for months on end. By late 2020, bitcoin was up fivefold from its March lows. To many, it looked like a supercycle. Three Arrows’ main fund posted a return of more than 5,900 percent, according to its annual report. By the end of that year, it was overseeing more than $2.6 billion in assets and $1.9 billion in liabilities.

One of 3AC’s largest positions — and one that loomed large in its fate — was a kind of stock-exchange-traded form of bitcoin called GBTC (shorthand for Grayscale Bitcoin Trust). Dusting off its old playbook of capturing profits through arbitrage, the firm accumulated as much as $2 billion in GBTC. At the time, it was trading at a premium to regular bitcoin, and 3AC was happy to pocket the difference. On Twitter, Zhu regularly blasted out bullish appraisals of GBTC, at various points observing it was “savvy” or “smart” to be buying it.