Deadly Leverage

In 2012, Chinese trader Su Zhu, along with his alumnus Kyle Davies, founded Three Arrows Capital (3AC). A small hedge fund founded by a young man, 3AC focuses on arbitrage trading and investing in crypto currencies.

Prior to entering the crypto currency industry, Su Zhu studied at Columbia University with Kyle Davies and then worked together in derivatives trading at Credit Suisse Group in Tokyo, with a background in traditional finance. Both were only 25 years old when they founded Three Arrows Capital and saw the huge opportunity that the crypto currency industry held, so they founded 3AC.


In 2018, Zhu Su and his Three Arrows Capital first gained fame because he accurately predicted the great crypto currency bear market of 2018, but he was also convinced that after the cold winter of 2018, the crypto currency world would once again see a spring and urged everyone to prepare for it, which helped him to accumulate 600,000 followers on Twitter.


Zhu Su himself said so and certainly did so. 2018-2019 crypto currency bear market, Three Arrows Capital invested in projects such as Avalanche, Solana, Polkadot, NEAR, etc., and when the bull market came, all of these projects gained amazing returns (tens to hundreds of times), which prompted 3AC to continue to invest more, with Terabit,, Terra Luna, Axe Infinity and other projects have received investments from 3AC and have become the source of huge returns for 3AC in 2021. In addition, 3AC has invested in Voyager Digital (Digital Voyager), a famous crypto currency broker in the crypto currency world.


Because of a series of successful investments, 3AC quickly rose to fame in the crypto currency world and became one of the largest hedge funds in the crypto currency world. At the peak of market capitalization in 2021, the total asset size under management of 3AC was as high as $13-18 billion, which, although not huge by Wall Street standards, is definitely heavy weight in the crypto currency asset space.


In traditional financial markets, there is a clear distinction between venture capitalists, commercial banks, brokerages, exchanges, fund companies, etc., but in the crypto currency space, 3AC is all of the above, both as a venture capitalist for many well-known crypto startups and as a treasury manager for these companies (Voyager’s funds are held at 3AC, for example), and as a borrower for some large lenders (borrowing from these lenders), lending money to many emerging funds, being their largest shareholder, and being a broker for many block chain token transactions ……


It should be noted here that this is not 3AC’s specialty; many of the large institutions in the crypto currency world operate in all kinds of businesses.


Overall, 3AC mainly operates by borrowing dollars or crypto currencies from some larger institutions and individuals, and then investing in some specific projects and tokens in the market, in short, using the borrowed money to add leverage to bets – when the bets are in the right direction, it will greatly magnify 3AC’s profit, but if the bets If the bets go in the wrong direction, it’s easy to die.


In addition to placing casino bets in person, 3AC’s interaction with Gray scale GBTC has begun to become extremely close since 2020. There is speculation that perhaps Gray scale artificially keeps the premiums going to attract more investors to participate, like the classic bridge in the movie “The Wolf of Wall Street:

If we want consumers to buy a pen in our hands, creating demand is the best way to do it, and a positive premium is “demand”, i.e., investors’ quest for profit.


With ultra-low interest rates in late 2020, 3AC borrowed from large digital asset lenders and wealthy Holder’s (long-time crypto currency holders) and entered into brokerage agreements with JPMorgan Chase and Bank of America to get USD or BTC (or other crypto currencies) through various channels, then exchanged it all for BTC and sent it to a gray scale trust fund to be minted into GBTC.


In April 2022, Juju and Kyle Davies even met with some of the world’s largest venture capital firms and sovereign wealth funds at the Sequoia Capital conference in Abu Dhabi, hoping to convince them to invest in crypto currency assets.




According to Gray scale’s GBTC share holdings report at the end of 2020, 3AC held a total of 6.1%, and its total market cap was up to $1.2 billion, and by the first quarter of 2021, the market cap of this portion of GBTC, was up to about $2.5 billion.


With such a large amount of liquid assets, it is almost certain that 3AC has used almost all of its own liquidity to do GBTC arbitrage, and it is this continued buying of BTC and being grayed out in a passive locked position that has sent the bit coin price soaring all the way up.


As for Block, which is second only to 3AC in terms of GBTC holdings at the end of 2020, you can understand it as the large commercial bank of the crypto currency world.


Block co-founder and CEO Zach Prince, with experience in both consumer lending and startups, has raised over $450 million from Wall Street and has a presence in the crypto currency world, covering the business landscape of lending, trading, trusts, and credit cards. Block sells securities in the form of crypto currency interest-bearing accounts (BIAs) to fund its lending business and proprietary trading funding; they provide interest income to crypto currency deposit users like a traditional bank – a financial service that is, of course, not protected by the SIPC (Securities Investor Protection Corporation) and FDIC (Federal Deposit Insurance Corporation).

GBTC continues to pay a premium, 3AC and Block continue to buy bit coin from the market to mint GBTC arbitrage, bit coin prices continue to rise, the higher the leverage is added, the more 3AC and Block earn, the higher the net asset value is, and so the left foot steps on the right foot, all the way to the sky, everything looks good.


According to statistics, 3AC’s asset pledge ratio is as high as 85%, and it maintains a high leverage operation by circulating pledged assets.


But, there comes a time when the music stops.


Seeing that Gray scale is using the Bit coin Trust to make a strong effort to sit back and collect money without much effort, there will of course be other institutions that want to come in and get a piece of the action as well.


On February 18, 2021, Canadian asset management company Purpose Investments’ Bit coin ETF was approved for listing, which is the first regular Bit coin ETF in the traditional financial market (code: BTCC.B). The asset management company, in order to compete with Gray scale, only charges a management fee of 1.5%, and this ETF can be bought and sold at any time, and can also be exchanged for BTC physical, in every aspect more free, more convenient and more suitable for ordinary investors than GBTC.


Given the success of the first ETF, a second Canadian bit coin ETF was soon approved, the 3iQ Coin shares Bit coin ETF (code: BTCQ), which has all the advantages of the first bit coin ETF, but at a lower rate of 1.25%.


The U.S. capital markets are so developed that the Bit coin ETF was actually preempted by Canada!


So, the SEC in the U.S. also started approving and releasing Bit coin ETFs. On October 19, 2021, the first U.S. Bit coin ETF was listed on the New York Stock Exchange under the name Portieres Bit coin Strategy ETF (ticker: BITO) with a management fee reduced to 0.95%.


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