In an interview with Bloomberg, the founders of Three Arrows Capital (3AC) have finally broken their silence after five weeks since the dramatic downturn in the market and the implosion of their hedge fund. Su Zhu and Kyle Davies have stated that it was mainly due to their trades involving Grayscale Bitcoin Trust (GBTC), Terra’s Luna (LUNA), and terraUSD (UST) tokens.
Back in June, Davies and Zhu confirmed that they realized around $200 million in losses that were related to the no longer operating UST algorithmic stablecoin and LUNA token. UST dropped to nearly zero during the last week of May while LUNA fell a week after.
“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,” said Zhu. The 3AC founders stated that they also failed to flag risks related to Terra as the rest of the market became affected by losses.
Both tokens are currently trading over 90% below their all time highs. While 3AC was very vocal about their bullish position on Terra, the hedge fund was also one of the largest GBTC holders.
GBTC is a regulated financial product that allows investors to purchase shares by giving Bitcoin directly to the trust. Holders of GBTC may then be able to sell their shares on over-the-counter (OTC) markets for a premium. This method of trading was very attractive for investors due to the high profits that were being made.
At the time, 3AC’s GBTC shares were locked for six months with an estimated value of over $1 billion. Falling prices meant that holders now had to take on losses. During this time, GBTC’s premium flipped to a discount over this last year and reached a record discount of 33.75% in June.
3AC experienced massive losses due to their exposure and leveraged position to GBTC. During the market-wide decline, GBTC went from $34 per share at the beginning of the year to $12 earlier this week.
While expecting a market rebound, 3AC continued to borrow from lenders but the rebound never came to fruition in time to save the hedge fund. After Bitcoin fell below $20,000, 3AC was unable to pay their loans to all of their lenders.
While referring to their GBTC position, Zhu shared that it “was extremely painful for us.” Adding, “That ended up being kind of the nail in the coffin.”
It is estimated that 3AC still owes about $3.5 billion to 27 different companies including $2.3 billion to digital currency lender Genesis Global Trading. Davies and Zhu declined to state where they currently are but a lawyer on the same call with Bloomberg said that the ultimate destination is the United Arab Emirates.
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