How Encryption Geniuses Vaporized Trillions of Dollars

This yacht is truly beautiful: approximately 500 tons, with a 171-foot hull made of glass and steel, pure white as snow, and equipped with a glass-bottom swimming pool. It was originally scheduled for completion in July, at which time one could enjoy sunset dinners in Sicily or sip cocktails on the lush shallow beaches of Ibiza. The $50 million yacht's prospective captain boasted to friends at a party about the photos, claiming it "is bigger than all the yachts of Singapore's wealthiest billionaires," and described plans to decorate the cabin with a projector screen to showcase their collection of NFT artwork.

This $150 million superyacht is the largest yacht sold by Italian luxury yacht manufacturer Sanlorenzo in Asia, and is considered a symbol of the cryptocurrency "nouveau riche" frenzy. "This represents the beginning of a fascinating journey," the yacht broker stated in the auction announcement last year, "looking forward to witnessing many happy moments aboard the vessel." The buyer gave the boat an amusing name - Much Wow.

The shipowners Su Zhu and Kyle Davies are two graduates of Andover University, operating a Singapore-based encryption hedge fund called Three Arrows Capital. However, they ultimately could not wait for the moment to celebrate with champagne at the bow of the Much Wow. Instead, in July of this year, the same month the yacht was about to be launched, the two filed for bankruptcy and disappeared before making the final payment, effectively "abandoning" the yacht at the dock in La Spezia, Italy. Although it has not been officially put up for sale, news of this luxury yacht has already begun to circulate within the international superyacht dealer community.

Since then, this yacht has become an endless meme and a topic of conversation on Twitter. From millions of small retail investors to industry insiders and investors, almost everyone has witnessed the moment when Three Arrows Capital - once possibly the most revered investment fund in the booming global financial industry - collapsed in shock or frustration. The company's collapse triggered a chain reaction, leading not only to a historic sell-off of Bitcoin but also "destroying" a large amount of the encryption industry's "achievements" over the past two years.

Many cryptocurrency companies in New York and Singapore are direct victims of the collapse of Three Arrows Capital. Voyager Digital, a publicly traded cryptocurrency exchange based in New York, was once valued at billions of dollars and filed for bankruptcy protection in July, revealing that Three Arrows Capital owed it over $650 million. Genesis Global Trading provided a $2.3 billion loan to Three Arrows Capital. Blockchain.com, an early cryptocurrency company that offers digital wallets and has developed into a large exchange, is owed $270 million in loans by Three Arrows Capital, which has not yet been repaid, and the company has laid off a quarter of its staff as of the time of writing.

Observers in the cryptocurrency industry widely believe that Three Arrows Capital bears significant responsibility for the cryptocurrency crash in 2022, as market chaos and forced liquidations led to a decline of 70% or more in digital assets like Bitcoin, resulting in over a trillion dollars in value evaporating. The CEO of a trading platform stated, "It is estimated that 80% of the causes of this crash can be attributed to the collapse of Three Arrows Capital," as the platform recently rescued several lenders on the brink of bankruptcy, making him possibly more aware of these issues than anyone else. "It's not just that Three Arrows Capital had problems; they just did it on a larger scale than anyone else. And because of that, they gained more trust throughout the entire crypto ecosystem, ultimately leading to more severe consequences."

For a company that has always portrayed itself as one that only plays with its own money - "We have no external investors," said Su Zhu, CEO of Three Arrows Capital, in an interview this February - the story came to a sudden halt, and the devastation caused by Three Arrows Capital is staggering. As of mid-July, the amount claimed by creditors has exceeded $2.8 billion, and this figure is likely just the tip of the iceberg. From the most well-known lenders to affluent investors, everyone in the cryptocurrency space seems to have lent their digital currency to Three Arrows Capital, including employees of Three Arrows Capital themselves, who deposited their salaries into its proprietary platform in exchange for interest. "Many people feel disappointed, and some feel embarrassed," said Alex Svanevik, CEO of blockchain analytics firm Nansen. "They shouldn't have done that, as many people's lives could be ruined because of it, and many people gave them money."

This money now seems to have disappeared, along with the assets of several affiliated funds and part of the funds from various encryption projects managed by Three Arrows Capital. The true scale of the losses may never be known, and for many cryptocurrency startups that have deposited funds with the company, publicly disclosing this relationship may face the risk of increased scrutiny from investors and government regulators.

Meanwhile, this abandoned yacht seems to be a somewhat absurd embodiment of the arrogance, greed, and recklessness of the company's 35-year-old co-founders. As their hedge fund is undergoing a chaotic liquidation process, Su Zhu and Davies are currently in hiding. For an industry that constantly defends itself, cryptocurrency practitioners have been trying to prove from day one that this is not a scam, but Three Arrows Capital seems to have single-handedly validated the "opponent's argument."

Su Zhu and Davies are two ambitious young men who are very smart and deeply understand the structural opportunities of digital currency: cryptocurrency is a game of creating virtual wealth out of thin air and convincing others using traditional currency forms. They insist that this virtual wealth should become real-world wealth. They build their social media credibility by playing the role of billionaire financial geniuses, converting it into actual financial credit, and then using billions of dollars in loans for speculative investments, which they can boost to success through their influential large platforms. Unbeknownst to them, the pretended billionaires grew into real billionaires with the financial power to buy super yachts. They fumble forward, but seemingly always manage to execute their plans perfectly, until the day of reckoning suddenly arrives.

In 2005, Su Zhu and Davies were seniors at Andover University. Su Zhu and Davies met at Phillips Academy in Andover, Massachusetts, which is known for having many children from great wealth or prominent families, but Su Zhu and Davies grew up in a relatively ordinary environment in the Boston suburbs. "Neither of our parents were wealthy," Davies said in an interview last year. "We were very middle class. They weren't particularly popular either. "They were both called weirdos, especially Su," a classmate said. "In fact, they aren't weird at all - just shy."

Su Zhu, a Chinese immigrant who came to the United States with his family at the age of 6, is known for his perfect GPA and heroic AP courses; in his senior yearbook, he received the highest honor of "most diligent." His work in mathematics earned him a special award, but he is not just a numbers expert - he also received the highest award for fiction at Andover upon graduation. "Su is the smartest person in our class," a classmate recalled.

Davies is also a star on campus, but his classmates see him as an outsider in other respects - if they remember him at all. As an emerging Japanese talent, Davies graduated with the highest honors in Japanese. According to Davies, he and Su Zhu were not particularly close at the time. "We went to high school together, went to college together, and found our first job together. He said in a crypto podcast in 2021 that we were never the best of friends." "I didn't know him very well in high school. I knew he was a smart guy - he was like the valedictorian of our class - but by college, we had more interactions."

"Going to College Together" is at Columbia University, where they both took math-heavy courses and joined the wallball team. Su Zhu graduated a year early with excellent grades and then moved to Tokyo to work in derivatives trading at a bank, with Davies following him as an intern. Their desks were next to each other until Su Zhu was laid off during the financial crisis, after which he joined a high-frequency trading platform in Singapore called Flow Traders.

There, Su Zhu learned the art of arbitrage - trying to capture the slight changes in relative value between two related assets, usually selling the overvalued asset and buying the undervalued one. He focused on exchange-traded funds, which are essentially mutual funds listed like stocks, buying and selling related funds to earn a small profit. He excelled in this area, ranking high in Flow's profit standings. This success gave him newfound confidence. It is well known that he would candidly criticize his colleagues' performance and even admonish his boss. Su Zhu stood out in another way: the Flow office was filled with servers and was very hot, and he would come to work in shorts and a T-shirt, then take off his shirt, not even bothering to dress properly while walking through the building's hallways. "Su would walk around bare-chested in his mini shorts," recalled a former colleague. "He was the only one who would take off his shirt while trading."

After Flow, Su Zhu worked at a bank for a while, following in the footsteps of a cryptocurrency legend and a billionaire co-founder of a trading platform. Davies stayed at the bank, but by then both were tired of the life in big banks. Su Zhu complained to acquaintances about the poor quality of his bank colleagues, who caused people to lose the company's money in trades without any consequences. In his view, the best talents had either left the hedge funds or were working for themselves. He and 24-year-old Davies decided to start their own platform. "There was almost no downside to leaving," Davies explained in an interview last year. "It's like, if we leave and really mess things up, we would certainly get another job."

In 2012, Su Zhu and Davies temporarily stayed in San Francisco, concentrating their savings and borrowing money from their parents to raise about $1 million in seed funding for Three Arrows Capital. The name comes from a Japanese legend in which a distinguished daimyo or warlord teaches his sons to distinguish between trying to break a single arrow - effortlessly - and trying to break three arrows together - impossible.

Davies said on a podcast that their money doubled in less than two months. The two soon headed to Singapore, which has no capital gains tax, and by 2013, they registered the fund there and planned to renounce their U.S. passports and become citizens. Su Zhu is fluent in both Chinese and English, navigating the social scene in Singapore with ease, and occasionally hosts poker games and friendly matches with Davies. However, they seem frustrated by their inability to take Three Arrows Capital to the next level. At a dinner around 2015, Davies lamented to another trader how difficult it was to raise funds from investors. The trader was not surprised - after all, neither Su Zhu nor Davies had much pedigree or track record.

At this early stage, Three Arrows Capital focused on a niche market: arbitrage of emerging market foreign exchange ( or "FX" ) derivatives - financial products ( linked to the future prices of smaller currencies ) such as the Thai Baht or Indonesian Rupiah (. The founder of a trading platform recently wrote in an article that entering these markets depends on establishing strong trading relationships with major banks, and entering these markets is "almost impossible". "When Su and Kyle told me how they got started, I..."