In 2022, the cryptocurrency industry endured one of its most chaotic periods in history, a chain reaction of failures often referred to as the crypto contagion. At the center of it all stood Three Arrows Capital (3AC), a hedge fund once celebrated as one of the most powerful players in digital assets.
Founded in 2012, 3AC rose from obscurity to manage billions in assets and became a prolific investor in many of the largest crypto projects. Its co-founders, Su Zhu and Kyle Davies, embodied the optimism of the “supercycle” thesis—the belief that crypto markets would only grow stronger with time. However, that belief turned to hubris. Leveraged bets, risky investments, and an inability to manage liquidity ultimately caused the fund’s downfall.
The implosion of 3AC triggered widespread losses, bankruptcies, and a reckoning about transparency and risk management in the crypto ecosystem. This article explores the rise of 3AC, the high-risk strategies that brought it down, the timeline of collapse, the ripple effects across the industry, and the lessons that continue to shape crypto today.
The Rise of Three Arrows Capital
Founded in Singapore in 2012, Three Arrows Capital originally specialized in foreign exchange and derivatives trading. By the mid-2010s, the fund pivoted toward digital assets, capitalizing on the rapid rise of cryptocurrencies.
By 2021, during the height of the crypto bull market, 3AC’s assets under management reportedly exceeded $10–18 billion. The firm invested heavily in projects such as:
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Ethereum, Bitcoin, and Solana
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Avalanche, Polkadot, and Aave
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BlockFi and Grayscale’s Bitcoin Trust (GBTC)
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Terra’s LUNA ecosystem
The fund’s co-founders were highly visible figures. Su Zhu, in particular, became known for his “supercycle” theory, arguing that crypto adoption had reached a point where downturns would be brief and markets would continually climb. Many in the industry viewed 3AC as a bellwether for the health of the ecosystem.
High-Risk Strategies and Overconfidence
GBTC Arbitrage Gone Wrong
One of 3AC’s most famous strategies involved the Grayscale Bitcoin Trust (GBTC). For years, GBTC traded at a premium to Bitcoin, offering an arbitrage opportunity: funds could buy Bitcoin, lock it into GBTC shares, and later sell those shares at a markup.
3AC borrowed heavily to fuel this trade, assuming the premium would persist. However, in 2021, the premium flipped to a discount, meaning GBTC shares were worth less than the underlying Bitcoin. This reversal caused billions in losses for 3AC, yet the firm continued to take on more leverage.
Heavy Terra/LUNA Exposure
In early 2022, 3AC made one of its riskiest bets: investing around $200 million into LUNA, the token behind the Terra blockchain. Terra’s algorithmic stablecoin, UST, promised yields of nearly 20% through the Anchor Protocol. 3AC believed Terra would cement itself as a dominant stablecoin ecosystem.
When Terra collapsed in May 2022, wiping out over $40 billion in value, 3AC’s investment was nearly obliterated. This loss weakened the firm’s balance sheet and exposed the fragility of its highly leveraged positions.
Excessive Borrowing Across Platforms
3AC borrowed billions from crypto lenders including Voyager, BlockFi, Genesis, and Blockchain.com. These loans were often collateralized with volatile tokens or based on reputation rather than strict risk assessments. When markets turned downward, 3AC faced a wave of margin calls it could not meet.
The Dominoes Begin to Fall
The first major shock came in May 2022 with the collapse of TerraUSD (UST) and LUNA. This event devastated 3AC’s balance sheet. By June, lenders and partners began demanding repayment.
3AC defaulted on multiple loans, the most public being a $665 million loan from Voyager Digital. This default triggered Voyager’s own bankruptcy weeks later. Similar ripple effects hit Genesis, BlockFi, and other platforms that had lent to 3AC.
On June 27, 2022, a court in the British Virgin Islands ordered Three Arrows Capital into liquidation. Shortly after, the firm filed for Chapter 15 bankruptcy protection in the United States, designed to protect foreign companies with U.S. assets.
Contagion Across the Industry
The collapse of 3AC didn’t just endanger its creditors—it destabilized the entire crypto lending sector. Many companies had significant exposure to the hedge fund, including:
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Voyager Digital, which declared bankruptcy in July 2022.
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BlockFi, which narrowly avoided collapse through a bailout from FTX (only to later fail after FTX’s implosion).
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Genesis, which froze withdrawals and later filed for bankruptcy.
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Blockchain.com, which reported over $270 million in exposure.
3AC’s failure revealed the interconnected web of crypto lending, where one highly leveraged player’s downfall could drag multiple others into insolvency.
The Human Drama: Zhu and Davies
As creditors demanded answers, co-founders Su Zhu and Kyle Davies seemingly vanished. Reports indicated they left Singapore and were unresponsive to liquidators. Courts described them as non-cooperative, making recovery of assets far more difficult.
In 2023, Su Zhu was arrested in Singapore for contempt of court due to his refusal to cooperate with the liquidation process. He served a prison sentence before being released. Remarkably, both founders later resurfaced with new ventures, including Open Exchange (OPNX) and other trading platforms, sparking outrage among creditors who had yet to recover their funds.
Timeline of 3AC’s Collapse
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2012: Three Arrows Capital founded in Singapore, focused on forex trading.
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2018–2020: Pivot to digital assets; early bets on Ethereum and Bitcoin pay off.
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2020–2021: GBTC arbitrage strategy and DeFi investments drive rapid growth.
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2021: Assets under management peak between $10–18 billion.
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Early 2022: Invests heavily in Terra’s LUNA ecosystem.
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May 2022: Terra collapses; 3AC loses hundreds of millions.
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June 2022: Defaults on major loans; fails margin calls.
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June 27, 2022: Ordered into liquidation by British Virgin Islands court.
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July 2022: Files for Chapter 15 bankruptcy in U.S.; estimated $3.5 billion owed to creditors.
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2023: Su Zhu arrested for contempt of court; Kyle Davies remains elusive.
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2024–2025: Founders re-emerge with new ventures despite unresolved debts.
Lessons Learned from 3AC’s Implosion
1. The Dangers of Leverage
Leverage magnifies gains but also magnifies losses. 3AC borrowed excessively across multiple platforms, leaving no margin for error when markets turned.
2. Risk of Interconnected Systems
The web of loans, rehypothecation, and exposure among crypto firms created systemic fragility. The fall of 3AC cascaded into bankruptcies across the sector.
3. Transparency Is Essential
3AC’s operations were opaque, and creditors often relied on reputation rather than verified balance sheets. Lack of transparency made risk nearly impossible to measure.
4. Overconfidence in Market Cycles
Zhu’s “supercycle” thesis blinded 3AC to risk management. Betting on perpetual growth is a dangerous strategy in any market, especially crypto.
5. Regulatory Oversight Matters
3AC operated across multiple jurisdictions with little oversight. Stronger regulation and reporting requirements might have curtailed its reckless strategies earlier.
The Broader Impact on Crypto
The implosion of 3AC reshaped the conversation around crypto risk management:
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Investors became more cautious: Retail and institutional investors alike grew wary of high-yield promises.
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Regulators accelerated action: Governments worldwide began drafting stricter rules for crypto lenders and hedge funds.
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Shift toward self-custody: Many investors pulled funds from centralized platforms, preferring wallets they controlled.
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Rise of transparency demands: Proof-of-reserves audits became more common after 3AC and FTX’s failures.
While crypto has begun recovering in the years since, scars from the 2022 contagion remain deep.
Conclusion
Three Arrows Capital’s collapse was a spectacular example of how leverage, hubris, and interconnectedness can destroy even the largest and most influential players in crypto. From billions under management to bankruptcy within weeks, 3AC’s downfall left a trail of bankrupt creditors, devastated investors, and shattered trust across the ecosystem.
Yet the lessons it provided remain invaluable. The need for prudent risk management, regulatory oversight, and investor skepticism has never been clearer. 3AC’s implosion will stand in financial history as a cautionary tale of unchecked ambition in an industry still finding its footing.
For investors, the takeaway is stark: in crypto, as in traditional finance, risk cannot be ignored, leverage must be respected, and transparency is non-negotiable.
