Three Arrows Capital’s Leveraged Implosion

In 2022, the collapse of Three Arrows Capital (3AC)—once one of the largest and most respected crypto hedge funds—became a defining moment of the “crypto winter.” Known for its aggressive bets, astronomical leverage, and close relationships across the crypto industry, 3AC’s downfall was both sudden and devastating.

What began as an ambitious hedge fund managing billions of dollars in assets turned into a high-profile bankruptcy that shook investor confidence worldwide. The implosion exposed the dangers of unchecked leverage, inadequate risk management, and the fragility of an interconnected financial system built on volatile digital assets.

1. The Rise of Three Arrows Capital

Three Arrows Capital was founded in 2012 by Su Zhu and Kyle Davies, two former Credit Suisse traders. Initially, the fund traded global macro products before pivoting to cryptocurrencies in 2018. By 2021, as the bull market raged, 3AC had become one of the most influential players in crypto markets.

Key highlights of its rise:

Managed over $10 billion in assets at peak, making it one of the largest crypto hedge funds.
Known for making early, profitable bets on Bitcoin, Ethereum, and Avalanche.
Invested heavily in innovative projects such as Solana, Terra (LUNA), and Axie Infinity.
Maintained deep connections with lending platforms, exchanges, and venture projects.

3AC’s founders cultivated reputations as visionary risk-takers, often appearing in media and promoting highly bullish forecasts. Their thesis centered on the “supercycle”—the belief that crypto had entered a phase of sustained growth immune to traditional boom-and-bust cycles.

2. The Strategy: Leverage and Risky Bets

The fund’s growth relied on aggressive strategies that worked during bull markets but proved catastrophic in downturns:

Extreme Leverage: 3AC borrowed heavily from lenders and counterparties, using its assets as collateral to magnify positions.
Concentrated Bets: A significant portion of capital was allocated to risky ventures like Terra’s LUNA ecosystem.
Illiquid Investments: Instead of sticking to liquid Bitcoin or Ethereum, the fund piled into venture-style tokens that were difficult to offload quickly.
Overconfidence in “Supercycle” Theory: Founders publicly dismissed concerns of downturns, believing crypto had entered a one-way growth trajectory.

This mix of leverage, overconfidence, and illiquid positions created a ticking time bomb.

3. The Trigger: Terra/LUNA Collapse

In May 2022, the algorithmic stablecoin TerraUSD (UST) lost its peg to the U.S. dollar, sparking a death spiral that obliterated both UST and its sister token, LUNA.

3AC had invested hundreds of millions of dollars in Terra-related assets.
When LUNA’s price collapsed by nearly 100%, 3AC’s holdings were virtually wiped out.
The event triggered broader contagion across the crypto market, dragging down Bitcoin, Ethereum, and other major tokens.

For 3AC, this was the first domino. But because of its leveraged structure, the collapse of one major bet reverberated across its entire portfolio.

4. The Unraveling: Margin Calls and Defaults

As crypto markets plunged, 3AC’s lenders demanded additional collateral—known as margin calls. But the fund could not meet them.

Voyager Digital, a crypto lender, issued a default notice after 3AC failed to repay a loan of $350 million USDC and 15,250 Bitcoin (worth over $650 million at the time).
BlockFi and Genesis also demanded repayments, with some exposure exceeding hundreds of millions.
Exchanges liquidated 3AC’s positions when margin requirements were unmet.

By late June 2022, 3AC had effectively collapsed. Its inability to service debts sparked panic among lenders, accelerating bankruptcies across the sector.

5. Bankruptcy Filing

On July 1, 2022, Three Arrows Capital filed for Chapter 15 bankruptcy protection in New York, seeking to shield U.S. assets during foreign liquidation proceedings.

Key details:

Court filings revealed creditors were owed more than $3.5 billion.
Assets under management had plummeted from over $10 billion in 2021 to less than $1 billion by mid-2022.
The firm’s founders went into hiding, with liquidators later alleging they were uncooperative and evasive.

The collapse marked one of the largest hedge fund failures in crypto history.

6. The Human Angle: Where Were the Founders?

After 3AC’s bankruptcy, co-founders Su Zhu and Kyle Davies became elusive.

Reports emerged of them fleeing Singapore, where 3AC was based.
Liquidators accused them of failing to disclose assets and obstructing investigations.
Eventually, Su Zhu was arrested in Singapore in 2023 for failing to cooperate with bankruptcy proceedings.

Their disappearance and alleged obstruction only deepened the scandal, reinforcing perceptions of recklessness and lack of accountability.

7. Contagion Across the Crypto Industry

3AC’s implosion rippled across the ecosystem, contributing to a wave of insolvencies:

Voyager Digital filed for bankruptcy, citing 3AC’s loan default as a major cause.
BlockFi and Genesis suffered severe losses tied to loans extended to 3AC.
Dozens of smaller firms and protocols reliant on 3AC’s capital were crippled.

The crisis revealed how deeply interconnected the industry had become, with one fund’s collapse sending shockwaves through lenders, exchanges, and investors worldwide.

8. Regulatory and Legal Fallout

Governments and regulators responded swiftly to the scandal.

Singapore’s Monetary Authority reprimanded 3AC for exceeding allowable investment limits and providing misleading information.
U.S. courts approved liquidators’ efforts to seize and recover assets globally.
Lawsuits sought to reclaim billions from assets allegedly hidden or transferred by the founders.

The case became a flashpoint for regulators seeking to rein in reckless leverage in the crypto space.

9. Lessons Learned

The fall of 3AC underscored several hard truths:

Leverage Can Be Fatal
Extreme leverage amplified losses, turning market downturns into existential threats.
Interconnected Risks Spread Quickly
Crypto firms’ reliance on each other created systemic vulnerabilities.
Transparency is Nonexistent Without Oversight
3AC’s opaque operations left creditors unaware of true exposures until too late.
Regulation is Essential
The collapse pushed regulators to demand stricter reporting, reserve requirements, and transparency from crypto hedge funds and lenders.

10. Broader Impact on Crypto Markets

The implosion of Three Arrows Capital contributed to the 2022–2023 crypto winter, characterized by:

Bitcoin falling below $20,000.
Ethereum dropping under $1,000 at its lows.
Billions in value wiped out from altcoins and venture projects.

Investor confidence was deeply shaken. For many, the episode echoed the Lehman Brothers collapse of 2008—a leveraged player’s failure exposing systemic weakness.

11. Timeline of Events

2012 – Three Arrows Capital founded.
2018–2021 – Rapid rise in crypto markets; assets under management soar.
May 2022 – Terra/LUNA collapse begins domino effect.
June 2022 – 3AC defaults on loans; lenders issue margin calls.
July 2022 – 3AC files for Chapter 15 bankruptcy.
2023 – Su Zhu arrested in Singapore; liquidators pursue hidden assets.

12. The Aftermath

Today, Three Arrows Capital exists only in bankruptcy proceedings. Creditors continue to pursue asset recovery, but much remains uncertain. The founders’ reputations are irreparably tarnished, and billions in investor wealth have evaporated.

Yet the broader industry has begun absorbing the lessons: greater emphasis on risk management, transparency, and regulatory compliance.

Conclusion

The leveraged implosion of Three Arrows Capital serves as a stark reminder of the perils of overconfidence, excessive leverage, and lack of oversight in financial markets. Once hailed as visionaries of the crypto supercycle, Su Zhu and Kyle Davies presided over one of the largest financial disasters in digital asset history.

For the crypto industry, 3AC’s collapse is a painful but pivotal chapter—one that underscores the necessity of discipline, transparency, and resilience in building the future of finance.