Three Arrows Capital: How a $10B Crypto Fund Failed

Key Takeaways

• A roughly $10 billion crypto fund collapsed in weeks once its borrowed bets turned against it.
• Concentrated positions in Terra/LUNA, GBTC, and staked ETH magnified losses under heavy borrowing.
• The fund owed about $3.5 billion to creditors; a BVI court ordered it liquidated.
• Founders fled, were later banned for nine years, and one was jailed for non-cooperation.

Background

Three Arrows Capital, often shortened to 3AC, was founded in 2012 by Su Zhu and Kyle Davies, two former classmates who started by trading emerging-market currencies with a small amount of capital. The firm later pivoted to cryptocurrency and, by 2021, had become one of the best-known crypto hedge funds in the world. It was registered in Singapore as a fund management company and held a license overseen by the Monetary Authority of Singapore (MAS).

At its peak in 2021, 3AC managed roughly $10 billion in assets, a figure cited in its later bankruptcy reporting. The founders were prominent voices in the crypto market, and Su Zhu in particular was known for a bullish "supercycle" thesis that argued crypto prices would keep climbing for years. That public confidence helped the fund attract capital and, more importantly, credit.

The credit is the part that mattered. 3AC did not simply invest its own money. It borrowed large sums from crypto lenders and trading desks, often against thin collateral, to build outsized positions. According to its U.S. bankruptcy filing, the fund owed about $3.5 billion to a list of creditors that read like a directory of the 2022 crypto credit market, including Genesis, Voyager Digital, BlockFi, and Celsius.

What made the structure look unstoppable was the same thing that made it fragile. Rising prices and easy lending let 3AC pile borrowed bets on top of borrowed bets. The whole arrangement depended on prices not falling far and on lenders not asking for their money back at the same time.

What Happened

The collapse of Three Arrows Capital unfolded over roughly six weeks in May and June 2022, after the Terra/LUNA crash drained value and confidence from the entire crypto market.

• May 2022: The Terra/LUNA ecosystem collapsed. Su Zhu and Kyle Davies later said 3AC took losses tied to its Terra exposure, and Zhu acknowledged the fund "failed to flag risks related to Terra." (CoinDesk; founder interviews)
• Early-to-mid June 2022: As crypto prices fell, lenders issued margin calls that 3AC could not meet. Reporting describes at least $400 million in liquidations of 3AC's positions across lenders during the downturn. (Contemporaneous reporting)
• June 22, 2022: Voyager Digital disclosed large exposure to 3AC and demanded repayment of a loan of 15,250 bitcoin plus 350 million USD Coin, worth roughly $665 million to $670 million at the time. (CNBC; Washington Post via reporting)
• June 27, 2022: Voyager Digital issued a formal notice of default after 3AC failed to repay by the deadlines Voyager had set. (CNBC; CoinDesk)
• June 27, 2022: A court in the British Virgin Islands ordered 3AC into liquidation, with partners from the advisory firm Teneo appointed to wind it down. (Eastern Caribbean Supreme Court order, reported; SDNY Chapter 15 opinion)
• July 1, 2022: 3AC filed for Chapter 15 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York to protect its U.S. assets. (SDNY Chapter 15 opinion)

The speed was striking. A fund that controlled billions of dollars weeks earlier was, by the end of June, an insolvent shell whose founders had stopped answering their liquidators. The same leverage that had made 3AC look like a giant on the way up turned it into a chain of defaults on the way down.

Why It Happened

The collapse of Three Arrows Capital was not a single bad trade. It was the combination of three concentrated positions, a wall of borrowed money, and a market that turned all at once.

Start with the concentration. By the founders' own later account, three trades did the most damage. The first was Terra/LUNA. 3AC had a large position in the Terra ecosystem and was personally close to its founder. When LUNA fell to near zero in days, the position became near worthless. Su Zhu described it to interviewers as "a LTCM moment for us," a reference to the 1998 hedge-fund blowup, and admitted the fund did not expect LUNA could fall that fast.

The second was the Grayscale Bitcoin Trust, known as GBTC. The Block and other reporting describe 3AC as one of the largest holders of GBTC, a product that lets investors hold bitcoin exposure through a trust. The trade worked while GBTC traded at a premium to the bitcoin it held. When that premium flipped to a steep discount through 2022, the position turned into a loss, and a borrowed position turned into a much larger one.

The third was staked ether, often written as stETH, a token representing ether locked in the Ethereum staking system. Zhu explained that once Terra collapsed, traders began to ask "are there people who are also leveraged long staked Ether versus Ether who will get liquidated." The stETH token slipped below the price of ether during the panic, and anyone holding it with borrowed money faced the same forced-selling pressure as everyone else.

Now add the borrowing. None of these positions would have been fatal at modest size. They became fatal because 3AC funded them with loans from crypto lenders, frequently against little collateral. When prices fell, lenders issued margin calls, demands to post more collateral or repay. 3AC could not meet them. Genesis later said its loans to 3AC carried "a weighted average margin requirement of over 80%, which 3AC had been unable to meet," and that the fund was about $462 million short of its collateral requirement as of June 15, 2022, per documents cited by The Block.

The final ingredient was correlation. In a calm market, a fund can sell one losing position to cover another. In June 2022, Terra, bitcoin, ether, GBTC, and stETH all fell together, so there was nothing to sell at a good price and no lender willing to extend more credit. MAS later found that 3AC's management firm "did not have in place a risk management framework" suited to the crypto assets it held. A concentrated, heavily borrowed book with no real risk controls is built to fail in exactly this kind of synchronized sell-off.

By the Numbers

• Assets at peak: roughly $10 billion under management in 2021, before the 2022 crash. (Fortune, citing bankruptcy reporting)
• Total owed to creditors: about $3.5 billion across 27 creditors in the bankruptcy filing. (Fortune)
• Genesis exposure: about $2.36 billion lent to 3AC, described as undercollateralized; 3AC was roughly $462 million short of its collateral requirement as of June 15, 2022. (The Block)
• Voyager loan in default: 15,250 bitcoin plus 350 million USD Coin, worth roughly $665 million to $670 million at the time. (CNBC; contemporaneous reporting)
• Liquidations during the downturn: at least $400 million of 3AC positions liquidated by lenders. (Contemporaneous reporting)
• Worldwide freezing order: a British Virgin Islands court froze up to about $1.14 billion of assets tied to Su Zhu, Kyle Davies, and Davies's wife, with outstanding claims against 3AC reported "in excess of $3 billion." (DL News)
• MAS prohibition: nine-year orders against both founders, effective September 13, 2023. (MAS; CoinDesk)
• Criminal-side sentence: Su Zhu jailed four months in Singapore for non-cooperation with the liquidation. (TechCrunch)

Aftermath

The damage did not stop at 3AC. Its defaults tore through the crypto lending market that had funded it. Voyager Digital, holding a defaulted loan worth roughly $665 million, filed for Chapter 11 bankruptcy in early July 2022. Celsius Network, another lender exposed to the same downturn, had already frozen customer withdrawals and filed for bankruptcy that month. Genesis, which had lent about $2.36 billion to 3AC, faced large losses, and its parent Digital Currency Group later assumed a claim tied to that exposure. The period became part of the 2022 "crypto winter."

The legal process around 3AC itself was slow and contested. A British Virgin Islands court, the Eastern Caribbean Supreme Court, ordered the fund into liquidation on June 27, 2022, and appointed Teneo as liquidator, with Russell Crumpler and Christopher Farmer named as the foreign representatives. On July 1, 2022, 3AC filed for Chapter 15 bankruptcy protection in the Southern District of New York, and the U.S. court later recognized the British Virgin Islands case as the foreign main proceeding.

The founders left Singapore before the collapse and stopped cooperating. The bankruptcy filing said Davies and Zhu had maintained "prolonged radio silence" and "kept their locations hidden," and described a video call on which "the two founders were on mute with their cameras off." The same filing detailed a down payment on a roughly $50 million yacht. In a July 2022 interview, the founders spoke from an undisclosed location and said they intended to relocate to the United Arab Emirates.

The official sanctions followed. On September 14, 2023, MAS issued nine-year prohibition orders against Zhu Su and Kyle Livingston Davies, effective September 13, 2023, for contraventions of Singapore's Securities and Futures Act 2001. MAS found that the firm provided false information to the regulator, exceeded the assets-under-management threshold for its license, failed to notify MAS of changes, and lacked an appropriate risk management framework. MAS's Assistant Managing Director Loo Siew Yee cited "Mr. Zhu's and Mr. Davies' flagrant disregard of MAS' regulatory requirements and dereliction of their directors' duties."

The liquidators pursued the founders separately. In late September 2023, Su Zhu was apprehended at Changi Airport in Singapore while trying to leave the country and was sentenced to four months in prison under a committal order obtained by Teneo for failing to comply with a court order to cooperate with the liquidation. A similar committal order was granted against Kyle Davies, whose whereabouts remained unknown, according to the liquidators. In December 2023, a British Virgin Islands court froze up to about $1.14 billion of assets connected to the founders. The outcomes are precise: the fund was ordered into liquidation, recognized as bankrupt in the United States, the founders were banned by MAS, and one founder was jailed for non-cooperation. These are civil and regulatory outcomes, distinct from any separate criminal fraud conviction.

Lessons for Investors

1. Borrowing turns a drawdown into a default. 3AC's positions might have survived a normal bear market, but the loans on top of them did not. When you owe money against an asset and that asset falls, the lender, not you, decides when you sell. The lesson is that borrowed money shortens your time horizon to whatever your lender allows, and in a panic that can be days. Size every position as if you may have to hold it through the worst case without fresh credit.

2. Concentration hides until it does not. Three trades, Terra, GBTC, and stETH, carried most of the damage. A book that looks diversified by name can be concentrated by exposure if those names rise and fall together. Before you trust a portfolio's spread, ask whether its parts would actually move independently in a crisis, because if they share one driver, you hold one bet, not many.

3. Know your counterparties, and theirs. 3AC borrowed from Genesis, Voyager, Celsius, and others, often against thin collateral. When it defaulted, those lenders absorbed the blow, and their customers absorbed it next. Whether you are lending, depositing, or trading, find out who is on the other side, how much they have borrowed, and what happens to your claim if they fail.

4. Correlation is the trap in a sell-off. In June 2022, everything 3AC held fell at once, so there was nothing to sell at a fair price. Diversification only protects you when the pieces are uncorrelated, and correlations tend to jump toward one exactly when you need them low. Stress-test a portfolio against a scenario where every position drops together, not just one at a time.

5. Risk controls are the product, not the paperwork. MAS found that 3AC's firm lacked an appropriate risk management framework for the assets it held. A fund can look brilliant for years and still be one shared shock away from zero if no one is measuring leverage, concentration, and liquidity. For any manager you trust with money, treat the existence and quality of real risk limits as a requirement, not a detail.

Frequently Asked Questions

What was Three Arrows Capital in simple terms? Three Arrows Capital was a Singapore-based crypto hedge fund that managed about $10 billion at its 2021 peak. It borrowed heavily to build concentrated crypto bets, and it collapsed in June 2022 when those bets fell and it could not meet margin calls.

Why did Three Arrows Capital collapse? The fund held large, borrowed positions concentrated in a few crypto trades, including Terra/LUNA, the Grayscale Bitcoin Trust, and staked ether. When the Terra/LUNA crash dragged the whole crypto market down in May and June 2022, lenders issued margin calls 3AC could not meet, and the borrowed positions cascaded into defaults.

How much money was lost in the Three Arrows Capital collapse? The fund owed about $3.5 billion to creditors in its bankruptcy filing, including roughly $2.36 billion to Genesis and a defaulted loan worth around $665 million to Voyager Digital. Its failure helped push Voyager and other lenders into bankruptcy during the 2022 crypto winter.

Could a collapse like Three Arrows Capital happen again today? Yes. The specific trades were unique to 2022, but the pattern of concentrated bets funded by heavy borrowing with weak risk controls is timeless. Some crypto lending has since pulled back and regulators have tightened oversight, but high-leverage, high-correlation strategies still exist.

What is the main lesson from Three Arrows Capital? The main lesson is that borrowing plus concentration is a fragile combination, because a single correlated sell-off can force you to sell everything at the worst time. Size positions, diversify by real exposure, and know who you owe and who owes you.

Sources

1. Monetary Authority of Singapore. MAS Issues Prohibition Orders Against Three Arrows Capital's Zhu Su and Kyle Livingston Davies. September 14, 2023. https://www.mas.gov.sg/regulation/enforcement/enforcement-actions/2023/mas-issues-prohibition-orders-against-three-arrows-capital-zhu-su-and-kyle-livingston-davies
2. U.S. Bankruptcy Court, Southern District of New York. In re Three Arrows Capital, Ltd. (Chapter 15), Opinion, Case No. 22-10920. https://www.nysb.uscourts.gov/sites/default/files/opinions/312810_79_opinion.pdf
3. Fortune. 3AC bankruptcy filing reveals founders' missteps, $50M yacht, $3.5B owed to creditors. July 19, 2022. https://fortune.com/2022/07/19/3ac-bankruptcy-filing-founders-missing-yacht-debt-creditors-owed/
4. CoinDesk. Three Arrows Capital Founders Say Terra, GBTC Trades Led to Fund Blowup. July 22, 2022. https://www.coindesk.com/business/2022/07/22/three-arrows-capital-founders-says-terra-gbtc-trades-led-to-fund-blowup-report
5. The Block. Crypto lender Genesis lent $2.36 billion to Three Arrows Capital. July 2022. https://www.theblock.co/post/158167/crypto-lender-genesis-lent-2-36-billion-to-three-arrows-capital
6. CoinDesk. Three Arrows Founders Hit With 9-Year Trading Ban in Singapore. September 14, 2023. https://www.coindesk.com/policy/2023/09/14/three-arrows-founders-hit-with-9-year-trading-ban-in-singapore
7. TechCrunch. Three Arrows Capital co-founder Zhu arrested in Singapore airport, sentenced four months in prison. September 29, 2023. https://techcrunch.com/2023/09/29/three-arrows-capital-co-founder-zhu-arrested-in-singapore-airport-sentenced-four-months-in-prison/
8. DL News. 3AC founders just got $1.1bn in assets frozen as Teneo aims to claw back funds. December 21, 2023. https://www.dlnews.com/articles/snapshot/3ac-founders-have-billions-frozen-in-liquidation-process/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.