Three Arrows Capital Founders Say Terra, GBTC Trades Led to Fund Blowup: Report

“What we failed to realize was that luna was capable of falling to effectively zero,” Three Arrows Capital co-founder Su Zhu said.

AccessTimeIconJul 22, 2022 at 11:44 a.m. UTC
Updated Jul 22, 2022 at 5:54 p.m. UTC

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

Trades involving the Grayscale Bitcoin Trust (GBTC), Terra’s luna (LUNA) and terraUSD (UST) tokens eventually led to the blowup of beleaguered crypto fund Three Arrows Capital, its founders told Bloomberg.

The fund's founders Kyle Davies and Su Zhu had previously confirmed they took on some $200 million in losses related to LUNA and the now-imploded algorithmic stablecoin UST. Prices of the two tokens entered a death spiral in mid-May and fell to nearly zero in the following weeks.

“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,” Zhu explained. He added that Three Arrows Capital, popularly referred to as 3AC, had failed to flag risks related to Terra.

LUNA lost nearly all of its value over the course of a week in mid-May, while ecosystem algorithmic stablecoin terraUSD (UST) fell to a few pennies after losing its intended peg with the U.S. dollar.

3AC was one of Terra’s most vocal bulls, and was additionally one of the largest holders of GBTC, an institutional bitcoin product.

Grayscale and CoinDesk are independent subsidiaries of the Digital Currency Group (DCG).

As a regulated product, GBTC allowed investors like 3AC to purchase shares directly by giving bitcoin to the trust. Holders could then sell the shares on over-the-counter markets for a premium – which netted a hefty profit for holders and became an attractive trade among investors.

GBTC shares were locked for six months, meaning falling prices led to holders taking on losses instead of profits. GBTC’s premium switched to a discount over the past year, reaching a record discount in June. This meant massive losses for investors like 3AC who piled on billions of dollars worth of exposure to the product. However, using leverage to juice up returns led to tears instead.

GBTC lost value in the past few months amid a market-wide decline. GBTC shares traded at over $34 at the start of this year, before sliding more than 50% to $12 earlier this week.

3AC continued to borrow from lenders expecting a market rebound. This was until bitcoin (BTC) fell to nearly $20,000 in late June, causing the firm’s positions to go awry and making it unable to repay any loans. The fund lost money on luna, its GBTC shares traded at a discount, and overall market declines meant all altcoin token holdings fell drastically in value.

“That was extremely painful for us,” Zhu said, referring to bitcoin’s fall. “That ended up being kind of the nail in the coffin.”

Investors are claiming that the defunct fund still owes them $2.8 billion. However, a 1,157-page court filing released on Monday shows individual claims worth over $1 billion.

DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

CoinDesk - Unknown

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

CoinDesk - Unknown

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

Trending

1
CoinDesk - Unknown
Voyager: ‘No Customer Will Be Made Whole’ Under FTX Proposal

FTX CEO Sam Bankman-Fried said his firm's offer would give Voyager customers back 100% of the remaining assets, while Voyager’s lawyers argue that it only benefits FTX.

CoinDesk - Unknown
2
CoinDesk - Unknown
First Mover Asia: BTC Falls Below $22.4K; Coinbase Shares Remain Alluring for Institutional Investors

Cathie Wood’s Ark Invest, ETF issuer Exchange Traded Concepts, Cullinan Associates and Utah-based Refined Wealth Management all significantly added COIN to their portfolios as per June 30 filings.

CoinDesk - Unknown
3
CoinDesk - Unknown
Accounting Rules Make the Outcome of Tesla’s Bitcoin Sale Unclear

After the car maker sold 75% of its bitcoin, Twitter piled on the company for losing money on the sale even though it didn’t.

CoinDesk - Unknown
4
CoinDesk - Unknown
How Bitcoin Can Support the Green Energy Transition

A new narrative for Bitcoin’s energy impact.

CoinDesk - Unknown