With a slew of death threats and an international manhunt launched for 3AC founders Su Zhu and Kyle Davies, silence hasn’t exactly been golden for the dynamic duo. In attempt to calm the storm, Zhu and Davies have now broken their silence after five weeks, but have offered little in terms of real answers.
In a call with Bloomberg, Zhu denied pulling out their money before the 3AC meltdown. “People may call us stupid,” Zhu said. “They may call us stupid or delusional. And, I’ll accept that. Maybe. But they’re gonna, you know, say that I absconded funds during the last period, where I actually put more of my personal money back in. That’s not true.”
Instead, Zhu said it was the death threats that forced the pair into hiding. “That does not mean that we haven’t been communicating with all relevant authorities, we have been communicating with them from day one.”
Read more: Crypto Bros Were Born to Run
According to a lawyer on the call, the pair’s “ultimate destination” is the UAE.
Davies added very little to the conversation too, except for stating the obvious. “The whole situation is regrettable,” he said, adding, “Many people lost a lot of money.”
Crypto Winter’s Fault
Citing weak market conditions, the pair said 3AC’s fate was sealed by tumbling crypto prices.
“We positioned ourselves for a kind of market that didn’t end up happening,” Zhu said.
“We believed in everything to the fullest,” added Davies. “We had all of our, almost all of our assets in there. And then in the good times we did the best. And then in the bad times we lost the most.”
Deflecting attention elsewhere, Zhu said 3AC was not the only ones affected during this period.
“It’s not a surprise that Celsius, ourselves, these kind of firms, all have problems at the same time,” Zhu said. “We have our own capital, we have our own balance sheet, but then we also take in deposits from these lenders and then we generate yield on them. So if we’re in the business of taking in deposits and then generating yield, then that, you know, means we end up doing similar trades.”
A topic of contention often brought up surrounding the duo’s disappearance is how they allegedly purchased a US$50 million yacht, which would be delivered whilst 3AC was going under.
The boat “was bought over a year ago and commissioned to be built and to be used in Europe,” Zhu said, adding the yacht “has a full money trail.”
Zhu added that the perception of the founders having an extravagent lifestyle was incorrect, claiming he rides a bike to work daily and his family humbly “only has two homes in Singapore.”
“We were never seen in any clubs spending lots of money. We were never seen, you know, kind of driving Ferraris and Lamborghinis around,” Zhu said. “This kind of smearing of us, I feel, is just from a classic playbook of, you know, when this stuff happens, when funds blow up, then you know, these are kind of the headlines that people like to play.”
The catalyst to all of this crypto mayhem is of course the fall of LUNA. Zhu and Davies spoke briefly about the defunct stablecoin and admitted to overestimating its potential..
“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 said.
“We began to know Do Kwon on a personal basis as he moved to Singapore. And we just felt like the project was going to do very big things, and had already done very big things. If we could have seen that, you know, that this was now like, potentially like attackable in some ways, and that it had grown too, you know, too big, too fast.”
“It was very much like a LTCM moment for us, like a Long Term Capital moment,” Zhu said. “We had different types of trades that we all thought were good, and other people also had these trades,” Zhu said. “And then they kind of all got super marked down, super fast.”
“Because Luna just happened, it, it was very much a contagion where people were like, OK, are there people who are also leveraged long staked Ether versus Ether who will get liquidated as the market goes down?” Zhu said. “So the whole industry kind of effectively hunted these positions, thinking that, you know, that because it could be hunted essentially.”
Investors contiuned to back 3AC following LUNA’s fallout, acting “as if nothing was wrong.”
“So I just think that, you know, throughout that period, we continued to do business as usual. But then yeah, after that day, when, you know, Bitcoin went from $30,000 to $20,000, you know, that, that was extremely painful for us. And that was in, that ended up being kind of the nail in the coffin.”
“If we were more on our game, we would’ve seen that the credit market itself can be a cycle and that, you know, we may not be able to access additional credit at the time that we need it. If, if it kind of, you know, it hits the fan.”
1 Billion Shades of Grayscale
3AC’s reliance on Grayscale Bitcoin Trust has also come into question while the pair have been on vaycay in the Middle East. Grayscale allows investors to buy shares in them through Grayscale Bitcoin Trust, (GBTC) instead of buying bitcoin directly. These shares are then sold at a premium on the secondary market.
In 2020, 3AC was the largest holder of GBTC with a position worth over US$1 billion.
“We managed to do it at the right window when it was a very big profit,” Zhu said about . “And then like others copied us into that trade later on and then lost not just the money, but also went into negative. Because everyone did it, then the trust went to discount and then it went to a far bigger discount than anyone thought possible.”
Not Taking Responsibility
What was a seasoned institutional player in the crypto space has crumbled, but Zhu claims the risks were on the cards the whole time.
“There was always an understanding of what they were getting themselves into – this was a risky firm,” Zhu said. “For us, if you go to our website, we’ve always had massive disclaimers about crypto risk. We’ve never once pitched ourselves as risk-free, like a simple yield.”
“We met all margin calls,” he said. “And, and so people understood that there was a risk involved.”
Lenders to the firm “benefited immensely when we were doing well, because as we were doing well, they could say, look, I make $200 million a year from Three Arrows’ financing business, give me a 10x multiple on that,” he said. “And now my own company’s worth $2 billion more. All these kinds of things. And so, like the risk departments were very relaxed about like the kind of risks that we were taking.”
“For Kyle and I, there’s so many crazy people in crypto that kind of made death threats or all this kind of noise,” Zhu said. “We feel that it’s just the interest for everyone if we can be physically secured and keep a low profile.”
“Given that we had planned to move the business to Dubai, we have to go there soon to assess whether we move there as originally planned or if the future holds something different for us,” Zhu added. “For now, things are very fluid and the main emphasis is on aiding the recovery process for creditors.”
Davies simply said: “I have a feeling my next year is planned for me.”
What We’ve Learned / TLDR
Zhu and Davies are in the UAE… They know 3AC has destroyed people’s finances, but don’t seem too fussed to do anything about it… And it was all the fault of LUNA, crypto winter, and investors who didn’t realise 3AC was risky in the first place… Thanks both.