How Did Three Arrows Capital (3AC) Collapse?

About 10 billion dollars under management at peak. Things started slipping in May 2022. By the end of June it had filed for liquidation. The full collapse: under 60 days.

Those are the headline numbers for Three Arrows Capital (3AC). It was once among the most-cited “institutional whales” in crypto — a single tweet from a founder could move altcoin prices. Then, over a few months, it vaporized from the industry — not only going to zero itself but dragging down a string of exchanges and lenders that had extended it credit. This article walks the timeline and, more importantly, what an ordinary user should take away.

Founders and origin

3AC’s two founders were Su Zhu and Kyle Davies, classmates at Phillips Andover in 2002. They went on to Ivy League schools, became FX traders at JPMorgan, and in 2012 spun out together to run a small emerging-markets currency arbitrage fund — long before any of this fame.

For most of its first decade, 3AC was a fairly “boring” small quant shop. Only when the 2017–2018 crypto bull arrived did they pivot into crypto. By 2021, 3AC had become one of crypto’s most-watched “grayscale whales” — long ETH, Solana, Avalanche, heavily involved in stETH and GBTC. Su Zhu’s slogan-like “supercycle” thesis — arguing this bull would last for years with no real bear market — landed in mainstream coverage during that stretch.

To understand the later collapse, you have to understand their self-image at the time: they weren’t a hedge fund in the “hedged” sense — they were a high-leverage gambler betting on a long, one-way crypto rally.

The leverage strategy: borrow fast, bet full

Three things sum up their playbook:

First, borrow from everywhere they could. Beyond inter-institutional unsecured loans, they pulled huge credit lines from Genesis, Voyager, BlockFi, FTX and more — much of it essentially uncollateralized, leaning on “3AC’s reputation.” Later disclosures put their borrowing from Genesis alone at over 2.3 billion dollars.

Second, funnel it all into crypto longs. Heavy in stETH (Lido’s ETH derivative), GBTC (the Grayscale Bitcoin Trust), LUNA, Solana, and a long tail of altcoins.

Third, rehypothecate the same positions repeatedly. Cross-lending and re-posting collateral across platforms stacked the on-paper leverage high. In a bull, this looked unbeatable — others made 10% at 1x while they made 50% at 5x.

But the structure depended on two preconditions: the pledged assets’ prices couldn’t crash, and the assets had to stay liquid. Both broke simultaneously after May 2022.

Luna’s collapse lights the liquidity fuse

In early May 2022, Terra’s algorithmic stablecoin UST de-pegged, dragging LUNA from over 80 dollars to near zero within days. The full sequence is on the Luna/UST collapse page.

3AC’s LUNA exposure was at least hundreds of millions — essentially all wiped. But the real horror wasn’t this single loss; it was what it set off:

• stETH started trading at a discount as the market panicked, marking down 3AC’s stETH collateral.
• GBTC’s long-running discount widened further, marking down GBTC pledged at lenders.
• Lenders began issuing margin calls one after another.

By mid-June, 3AC couldn’t meet the calls and some platforms started forced liquidations. 3AC’s positions were themselves a major liquidity source in the market, so their forced selling accelerated the drops in ETH, stETH, and SOL — a textbook death spiral.

Throughout, Su Zhu was publicly saying “the team is in communication with relevant parties,” while on-chain data and reporting increasingly showed they were insolvent and that some core assets had quietly moved into wallets under personal control. The script reads remarkably like the FTX collapse half a year later.

A cascade of platform failures

3AC’s default landed like a falling domino, with several directly affected parties going down in sequence:

• Voyager Digital: about 650 million dollars outstanding to 3AC; halted withdrawals in late June and filed for bankruptcy in July.
• Celsius: closely tied to 3AC and exposing its own high-leverage problems at the same time; halted withdrawals in June and went bankrupt.
• BlockFi: hundreds of millions of exposure; briefly “rescued” by FTX, but FTX itself fell in November, taking BlockFi down with it.
• Genesis, BitVavo, Deribit and others confirmed outstanding exposure; some platforms never fully recovered.

This cascade was crypto’s first systemic crisis to play out as an institutional chain reaction and the definitive end of the “supercycle” narrative.

Liquidation and aftermath

On June 27, 2022, a BVI court ordered 3AC into liquidation. Both founders essentially went into hiding afterward — no public appearances, no cooperation with the liquidators. Su Zhu was arrested at a Singapore airport in April 2023 and sentenced to four months; Kyle Davies later faced similar legal trouble.

Liquidators have pursued 3AC assets across multiple jurisdictions, but the final recovery rate for most creditors has been very limited.

Institutions blow up too — what can retail learn

The most counterintuitive thing about 3AC’s story is that the collapse wasn’t from a stupid team. It was a model failing in a new environment, plus human nature deforming under pressure. Three directly applicable lessons for ordinary users:

First, “institutional backing” doesn’t equal safety. 3AC’s loans made Voyager, Celsius, and BlockFi look like “stable platforms with big clients.” The same packaging today applies to anything waving “institutional custody / institutional partnership” — the backing doesn’t remove underlying risk, it just makes it harder for you to see. Read together with choosing a crypto exchange criteria.

Second, leverage isn’t a return amplifier, it’s a time compressor. 3AC enjoyed years of bull-market leveraged gains and paid them back in 60 days. That ratio isn’t unique — it’s the nature of leverage. Before touching it, internalize the real risks of crypto leverage.

Third, counterparty risk often dwarfs market risk. Even if your own positions are healthy, parking funds on a platform that has a counterparty like 3AC means your assets are silently backstopping someone else’s leverage. Move coins back to wallets you control — the simplest defense — which is why hot vs cold wallets and self-custody get hammered into beginners.

Months before the collapse Su Zhu was still tweeting about the “supercycle.” That’s a warning to every observer: when the most respected voice in an industry starts talking in the least prudent way, you’re usually in the most dangerous part of the cycle. That lesson is worth more to retail investors than any technical detail.