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Three Arrows Capital Accused of Operating' Madoff-Style Ponzi Scheme' by FSInsight
Summary: FSInsight claims Three Arrows Capital "Brought the crypto industry to its knees," according to an article by Fortune. The report accuses Three Arrows of using new investor capital to pay old investors while making no actual returns. According to the report, Su Zhu and Kyle Davies, the founders of Three Arrows Capital, leveraged their reputation ...
FSInsight claims Three Arrows Capital "Brought the crypto industry to its knees," according to an article by Fortune. The report accuses Three Arrows of using new investor capital to pay old investors while making no actual returns.
According to the report, Su Zhu and Kyle Davies, the founders of Three Arrows Capital, leveraged their reputation to "recklessly borrow from just about every institutional lender in the business." This created substantial pain for almost every lender and brought the industry "to its knees."
The report said Three Arrows Capital had an AUM of over 18 billion dollars. Given the amount of money that has been loaned to the firm, it is hard to gauge how much actual equity was at risk. Likely, Zhu and Davies were simply "using borrowed funds to repay interest on loans issued by lenders, while 'cooking their books' to show massive returns on capital," the note added.
Multiple factors caused this leveraged wipeout and the implosion of Three Arrows Capital, according to FSInsight. "The macro conditions preceded destruction in global asset prices, reducing the collateral value of any crypto asset, and 3AC was heavily invested in LUNA/UST, which couldn't have helped the situation. However, we think the downward spiral started with 3AC's over-leveraged bet on Grayscale Bitcoin Trust."
The main issue for Three Arrows was that they were exceptionally leveraged in GBTC and locked into the trade, FSInsight said. However, although they could exit the trade after funds were unlocked, 3AC likely doubled down. It seems they expected the price to rebound to net asset value once a spot ETF was approved.
Most investors can stomach short-term increases in volatility, but the excessive margin that Three Arrows took on appeared to be too much as asset prices tanked a few weeks ago. This triggered multiple margin calls for the firm and collapsed the "daisy chain of leverage together" that the firm had created.
Author: Garrett Meifert
Tags: GBTC,Three Arrow Capital
Link: Three Arrows Capital Accused of Operating' Madoff-Style Ponzi Scheme' by FSInsight [Copy]
