Three Arrows (Right to the Chest)

Last week we noted that Three Arrows Capital (3AC), a prop shop headed by the once-beloved Su Zhu and Kyle Davies, was on the brink of exiting the industry. Well, if you have been following our daily market updates, you know by now that this did indeed happen, and 3AC unleashed chaos of leverage unwinds on its way out the door.

In the past week, we witnessed yet another bout of forced selling, leading to a magnitude of liquidations that rivaled the leverage unwind experienced over a month ago when Luna/UST blew up.

Some Combination of Madoff and Long-Term Capital Management

Now that the dust has settled a bit and the pieces are starting to come together, it appears that the industry was brought to its knees the past two weeks by an old-fashioned Madoff-style Ponzi scheme, wrapped in a trade that was fundamentally similar to the positions that steered Long Term Capital Management off a cliff.

Madoff, in this scenario, is obviously Davies and Zhu, who built an admirable reputation in the space, hailed by many as industry-defining “forward thinkers.” They had many thoughts on technology and finance that our team found helpful, and by all measures, the duo was objectively well-versed on many crypto-related topics. However, the application of their theses manifested itself as downrig...