3AC Co-Founders: UST, Luna, and GBTC Trades Caused Fund Disputes

• Founders of 3AC confirmed that Terra and GBTC trades destroyed the firm’s crypto fund.
• Co-founder Su Zhu admitted that 3AC failed to realize that Luna could fall to zero.
• The firm continued to borrow until their debt piled up to $3.5B, as per court filing.

Three Arrow Capital (3AC) co-founders, Kyle Davies and Su Zhu, told Bloomberg that trades containing Grayscale Bitcoin Trust (GBTC), Terra’s luna (LUNA) and terraUSD (UST) tokens has caused to the disputes of the troubled crypto fund of the company.

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The SIngapore-based crypto hedge fund founders confirmed that the company lost almost $200 million due to Luna and the depegged stablecoin UST, which prices dropped in mid-May and knocked down to nearly almost nothing in the following days.

Zhu clarified that 3AC failed to identify risks related to Terra’s crash. He opined:

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

3AC was one of the largest holders of Terra’s tokens and GBTC, a digital currency investment bitcoin product. Grayscale is an independent subsidiary of the Digital Currency Group (DGC), a venture capital company focused on the cryptocurrency market.

GBTC is a regulated product that enables investors, such as 3AC, to buy shares instantly by offering Bitcoin to the trust. These shares are locked for six months, denoting that holders might be forced to take losses instead of profit upon price drop.

In June, shares of GBTC premium reached a new all-time-low since 2017. Investors like 3AC, who load billions of dollars worth of GBTC, have lost an extensive amount. The value of GBTC continuously dropped in the past few months during the crypto meltdown. The GBTC shares, which were traded at over $34 by early January, have now dropped more than 50% down to $12 earlier this week. 

Despite the market crash, 3AC continued to borrow from lenders and was looking for a market bounce. However, 3AC’s position went wrong and made it unfit to repay any loans when Bitcoin dropped below the $20,000 mark in late June.

Eventually, 3AC filed for a Chapter 15 bankruptcy on July 1, a few days after being ordered into liquidation by a British Virgin Islands court. Earlier this week, a court filing made public showed that 3AC owes $3.5 billion to 27 companies.

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