 Well, let me just ask that news today instead of talking about the news I want to share with you a Piece that talks about exactly what happened with three arrows capital and the reason why I want to talk about this is because I don't want anybody to To mismanage or forget exactly what happened here. I think as time moves on it's important that we go through Exactly what happened that really brought down the entire crypto market From a high of over three trillion down to a trillion today. It is August 2022 and we're gonna go over exactly what happened with three arrows capital and I got to tell you after going through this multiple times these stories It makes a lot of sense as to why big Capital fell victim to what happened here with heroes capital like a Celsius like a Voyager not making excuses But I see exactly what happened. So first before we get started Let me make mention of this. This is important. We don't learn from experience We learn from reflecting on experience the same kind of thing that Warren Buffett would say You have to learn from mistakes. They want to be your mistakes But you still have to reflect on the mistakes and think about exactly what happened and as time moves forward There's gonna be people who are just gonna hear about three arrows capital and not gonna know Exactly how big this story was and how fast The entire market can circle the drain on the actions of Just one or two people so to get into this there was a great story and it started off It's on NY mag and it was a pretty big expose into the history of three arrows capital This is zoo and Davies the two gentlemen who were Responsible for three arrows capital and this is their story. So instead of being like the news This is gonna be more like a Deep dive until we just what the heck went wrong. So These are the stats that clearly states the crypto geniuses who Vaporized a trillion dollars quite easily as a matter of fact and the first part here is Not to give us much history, but just to give us context as to where we're coming from the boat was a beauty some 500 tons across a hundred and 71 feet 171 feet of glass and steel as wide as Santorini all around the edges five decks with one with a glass bottom pool We're made for July on a Mediterranean sunset dinners among the islands near Sicily cocktails in the turquoise shallows off the coast of Abiza The would-be captain showed off pictures of the 50 million vessel at parties bragging that it'd be bigger than any of the billionaires Yachts in Singapore and describing plans to go to the state room objective screens and a bunch of other stuff As far as like digital art in the form of NFTs and that's just to tell you how far ahead These two guys were Suzu and Kyle Davies three arrows capital never got the chance To spray champagne across much. Wow is bow. That was a name apparently Of the yacht that it was being bought much. Wow Pretty much of a reference to dogecoin in July the same month the boat was set to launch the duo followed for bankruptcy and Disappeared before making their final payment or ruining the unclaimed trophy in the birth at Laspecie on the Italian coast So they paid off the hundred fifty million dollars. Just let it sit there just because they could Crypto companies from New York to Singapore were direct victims of three arrows Voyager Digital the publicly traded crypto exchange based in New York That once had a multi-billion dollar valuation fell for chapter 11 in July reporting at three arrows owed at more than six hundred and 50 million dollars Genesis global trading headquartered in Park Avenue had lent three hours at 2.3 billion Blockchain comm and early crypto company by digital wallets They lent them 270 million unpaid loans from 3ac and is laid off a quarter of its staff Because it can never get these backs and then just to bring things into context We're actually right now Going through chapter 11 with Voyager Digital So they are going through it. So I'll see is going through the same thing and we can take a look at it right here We can see this is the financial snapshot. This is just in June. I don't know where this is going It'll be interesting Case study as time moves on but you can see right here the financial snapshot if we blow this up a little bit This is as of June 30th, and this is in millions of dollars So the total cash they have my hand is 104 million total crypto loaned loaned It states here 470 million which is a little different because over here. It said it was 650 million Maybe they paid some back total crypto held and loaned is 1.26 or 1 billion $260 million and it states here total recoverable assets Are 1.26 zero so if all the total crypto loaned is Going to 3ac. I don't think that's recoverable, but it remains to be seen So the total unsecured claims this is estimated customer claims and other unsecured claims because they don't know is 1.8 billion dollars. So if we take 1.8 Minus 1.2 looks like a pretty good stage. However, I don't think that that 470 million is there I think it's actually the total crypto held is 685 million Plus 104 you're looking at 789 million minus 1.8 now We'll see what happens, but as we get into the story you can see how the chances could be potentially quite slim so moving on Three arrows is meaningfully responsible for the larger crypto cash of 2022 and If you're watching this in 2024 or 2025 or I don't know 2023 when there's a next bull run I don't know when it's going to be but just remember this on the next bull run because it's important that you know this Sam Bakeman Fried said I suspect they might be 80% of the total Original contagion which means like if it wasn't for 3ac and Luna for one one way We wouldn't we may be still in this in a bull run and who knows For a firm that always portrayed itself as playing just with its own money Where they say we don't have any external investors 3ac ceo it told Bloomberg is recently as February by mid-July Creditors had come forward more than 2.8 billion in claims. So at first they said hey We don't use anything but our own money and that was in February Then in July they had 2.8 billion in outstanding claims interesting. So somebody was lying Everyone in crypto from the largest lenders to wealthy investors seem to have lent 3ac their digital coins that money appears to be gone The true scale of losses may never be known for many of the crypto startups that parked their money with the firm disclosing that relationship publicly Is to risk increased scrutiny from both their investors and government regulators? So again, I don't think this is over by any stretch the imagination I think there's a lot of people out there who are owed a lot of money that but we'll never say that it's 3ac's Until they collapse and then they'll say well, this is the reason why so that is just One thing that could potentially happen Moving down a little history sue zoo and and Kyle Davies met a Phillips Academy in Andover, Massachusetts They went to college together at Columbia Well, they both took a math heavy course load So you graduate early year assume a cum laude with a Tokyo to trade derivatives at Credit Suisse Where Davies fallen as an intern and it's important to know the history because you don't know where you're going Until you know where somebody's been they had desks next to each other until zoo was laid off in the financial crisis Landing at a high-frequency trading shop in Singapore called flow traders zoo learn the art of arbitrage capturing small variations in value between two assets selling one that's overpriced and buying one that's underpriced you focused on ETFs he excelled at rising to the top percentile of money makers at flow and After a flow they left zoo dentist in at Deutsche Bank Davies had stayed on the on a credit Swiss by then both were tired of the big bank life zoo complained to acquaintances about the low caliber of His banking colleagues in a bloated culture that allowed people to lose the firm's money on a trade with little consequence I just left that in there not that it was important to know about these gentlemen But it's important to know about banks in general So just know that people that are looking out for you and your money Nobody's looking out for you and your money harder than you are so just remember that you're smart enough to understand these things in 2012 They both pooled their savings and borrowed money from the parents to scrape together about a million in seed funds for three arrows capital in less than two months They had doubled their money the pair went to Singapore because it had no capital gains tax by 2013 They registered a fund with plans to relinquish their US passports and become citizens So it was very well set up in Singapore by 2013 during the early phase Three arrows capital focused on a niche market arbitrage emerging market for an exchange or FX derivatives Financial products like the Thai bot or the Indonesian rupee offer instance where they would go back and forth At the time FX trading was moving to electronic platforms And that's amazing in in such a not too long ago in 2015 When this was happening at the time 2015 FX trading was moving to electronic platforms And it was easy to find differences or spreads between the prices quoted to different banks Three arrows found its sweet spot trolling the listings for mispricings and picking them off often pocketing just fractions of a cent on each dollar traded and It was a strategy that the banks detested and there's a reason that they detested so much because they could have actually pocketed that money They didn't because these two guys were playing arbitrage By 2017 and this is important date to remember this by 2017 The bank started cutting them all off Whenever three arrows requested a price all the bank FX traders were like F these guys. I'm not gonna price them Lately a joke has been going around among FX traders who knew three arrows in its early days and watch it collapse with a bit of Schadenfreude Schadenfreude German for just a little bit of happiness at someone else's despair We FX traders are probably to blame for this because we knew for a fact these guys were not able to make money in FX But then when they came to crypto Everyone thought they were geniuses and that's the problem and just remember this in the next bull run the people that become the next Geniuses the next bull run. It's not hard to be a genius in a bull run Everybody is look for the ones That have been around for quite some time that have actually done well in the bear markets That's the biggest bell whether you can find of success. So that date remember 2017 is when they got started to get kicked off by the banks in late 2017 Crypto crash of three thousand dollars three arrow switch It's focused the crypto sorry to invest at such an opportune time that zoo was often credited Which is to say it's a credit for calling the bottom in later years It looked like brilliance to many Impressionable crypto nubes and even industry in his insiders timing may have may have been just bad luck Or been luck after all three girls was looking for a new racket So for you who watching this later on just remember just because someone says they they call the top They call the bottom does not mean that they are a genius or that they know any something that anybody else knows Sometimes people just get lucky and all he had to do is call the top enough and you say, you know what the tops in April Maybe no no tops in May no no tops in September. No no tops in November. Oh see I told you top was in November It doesn't matter Just take a look at who does well in these bear markets and what makes sense to you so To continue on finish this up with crypto trading on exchanges around the world the firm's experience with arbitrage came in handy One famous trading strategy was known as the Kim Chi premium involved buying Bitcoin in the US or China and selling at a higher price in South Korea where the exchanges were more tightly Regulated resulting in higher prices. I believe the Sam Bakeman Fried did a lot of that He was into arbitrage and selling between different exchanges and making quite a profit At the time winning trade setups like this were plentiful and profitable 3ac told investors that practiced low risk strategies designed to make money in both bullish and bearish time So if you think about that It wasn't rocket science All they did was just find prices that were lower And then they would sell it off to places that prices were higher You can do that in a bear or a bull market So it doesn't take a lot of brain power just takes a lot of effort or even minimal effort Other crypto arbitrage might involve buying bitcoin at its current or spot price while selling bitcoin futures or vice versa In order to harvest the price premium 3ac began borrowing money and putting it to work and this is where we call leverage If it all went well it could generate profits that more than covered the interest at owed in the loan Then it would do it all over again Continue to grow its pool investments which would allow it to borrow even larger sums and they kept doing that at mass Beyond heavy borrowing the firm's growth strategy depended on another scheme building lots of social media clout And crypto the only social media platform is twitter crypto twitter and uh, I like to peruse that every so often It is a little toxic by entertaining But if you can't stomach it, please don't please don't go to it Zoo and baby's earned his way into the elite upper tier of crypto twitter According to friends zoo at a conscious plan to become a twitter celebrity it entailed tweeting a lot pandering to the crypto masses without outrageously bullish prognostications Racking up a huge number of followers and uh becoming an apex predator on crypto twitter Profiting the expense of everyone else. I want to read that one more time tweeting a lot pandering to the masses by saying that there's going to be massive bullish movement Think about the people that you hear and see that are always bullish 24 7365 Regardless of the reality that they're in Zoo gained his 570,000 strong following a part by promoting a theory of a crypto Cycle the idea of a years-long bull market for bitcoin With prices rising well into millions of dollars per coin and zoo tweeted actually tweeted this. Let me show you He would tweet like this. This is back in october 26 2021 not too long ago for us. I don't know when you're watching this And zoo says as the super cycle continues butts or mainstream media will try to talk about how the early whales own everything The richest people in crypto now had Nearest zero net worth in 2019. I know people who unironically say if someone had lent them 50k more They'd have 500 million more now and that is quite enticing Zoo hammered the point constantly on the platform and in his appearances on crypto podcast And he would say bye. Bye. Bye and the super cycle will make you insanely rich someday They used to boast that they can borrow as much money as they want This was all planned From the way they established credibility all the way the fund was structured and I have to tell you if If there wasn't for a collapse of luna and some other issues, I think this could have gone on for quite some time I think they could have kept borrowing money And making a lot of arbitrage opportunities or buying along these different defy and derivatives I think they could have done quite well, but again When the bear market comes we start to see who's swimming naked and that is what happened here Even though the firm the firm was thriving during the pandemic The federal reserve pumped money of the economy and the u.s. government sent out stimulus checks Crypto markets rose for months on ends by late 2020 bitcoin was up five-fold to many looked like a super cycle Three year was main fund posted a return of more than 5900 by the end of the year is overseeing 2.6 billion In assets and 1.9 billion in liabilities a pretty good company One of 3 ac's largest position was the grayscale Bitcoin trust and the firm accumulated as much as 2 billion in gbtc at the time was trading at a premium To regular bitcoin because it wasn't bitcoin. It was paper bitcoin and 3 ac was happy to pocket the difference On twitter zoo regularly blast out bullish appraisals of gbtc at various points Deserving it was savvy or smart to be buying it which a lot of people were doing that Because they were banking on the fact that it could actually become a spot etf and it didn't zoo and davis public persona became even more extreme their tweets were increasingly pompous And social acquaintances say they didn't bother to hide their condescension Put friends from the past and wealth less wealthy contemporaries and again When you're seeing people on this crypto twitter or different places that look down on people Or they say have fun being poor or stuff like that That's just when hubris gets way way too far in the way and a crash is coming at some point It's called karma and really does suck, but it's what has to happen Three years continue to be a giant funnel for a borrowed capital a lending boom had taken hold of the crypto industry as defy Products offer depositors much higher interest rates Then they could get at traditional banks three hours wood through its borrowing desk take custody of crypto That belong to employees for another rich individuals when lenders asked three hours to put up collateral It would just push back Instead it offered to pay an interest rate of 10 or more Higher than any competitor was delivering because of its gold standard reputation as one trader put it Some lenders didn't even ask for audited financial statements Or any documents at all. So this is all I'm going to jump back and just say I understand now We're like a voyage or a celsius or evolved or all these different places. They might think to themselves. Okay. These guys are pretty good They're managing a multi-billion assets under management. Everybody knows for a while. They were derivative traders They know what they're doing. We can see it. It looks good. Let's go forward. We need some collateral You don't need collateral. We're going to give you up to 10 percent And we're going to give you higher yield than anybody else will so don't ask us for a collateral We'll we'll give it to you on the front end or the back end. They say great So now what does that mean if you're a voyage or a celsius or whoever else it is You honestly want to pass that on to my customers? So i'm going to give them an eight percent yield on whatever stablecoin or crypto they want to do I'm going to pocket the one percent and i'll take the other one percent or i'll give it back Two three arrows capital or maybe i'll do a split of eight and two doesn't really matter because it's all depends on what they were told So when I see these things I get it, but the one thing that does not escape me Is this last sentence right here where it says quite clearly Some lenders didn't ask for audited financial statements Or any documents at all is that saying that they all didn't do it? Maybe maybe not but I can tell you right now These types of audits and these types of paperwork it can all be manipulated for the where someone could say Oh, you actually do have that on file or you do have that in the bank. We trust you. Here's your loan So I'm not here to make excuses for anybody. I'm just kind of saying I can see What happened? The trouble Seems to have started on this last year Three hours huge bet on grayscale bitcoin was the none of it The firm reaped the rewards when there was a premium It felt the pain when gbtc began training at a discount as more people pod in the trade new alternatives emerge The premium disappeared then went negative all arbitrage dies after a point Davies was aware of the risk this posed the three arrows and on a september 2020 episode of a podcast called castle island He admitted he expected the trade would fade But before the show aired davies requested that the segment be edited out and the firm obliged That's fine. You can do what you want to do if someone says I don't want to have them there You take it out. I've done that before myself Three arrows gbtc shares were locked up for six months at a time But zoo and davies Had a window to get out sometime that fall and they still didn't do it They had apple opportunity to get out with her grays But not blew themselves up and they got two ahead of themselves and too much pride And they didn't take it out and that's a big part of why they collapsed on top of some other things Which we'll get into right now Colleagues now say three arrows hung in its gbtc position because it was betting the sec would approve The conversion of a spotty tf and that didn't happen Crypto enjoyed a bull run the last end of april with bitcoin hitting a record above 60 000 and dogecoin Started as a joke it went up because of uh pretty much elon musk Report puts three acs assets at some 10 billion dollars at the time So you know all those things are going to grayscale bitcoin. They were still up Three acs assets at 10 billion However, this was setting nansen and nansen ceo now clarifies that much of the sum Was likely borrowed. So, you know, they had 10 billion on paper It was from everywhere else where people were giving them money In retrospect three or senior scepter of fatal loss later that summer in august Two of the funds minority partners who were based in hong kong and worked between 1,800 hours they quit Or they retired and around that time they were signed that three years was hitting a cash crunch when ledgers lenders asked for collateral It often came back pledging its equity in dairy bit, which was an exchange Or a company where they had a bunch of funds into it. They said, oh, no We'll just give you shares of of dairy bit and that'll be our collateral However, you liquid assets like a company aren't ideal collateral, but there was another snag Three arrows owned the dairy bit stake with other investors who refused to sign off on using their shares as collateral Three ac apparently was attempting to pledge assets It didn't have the rights to so what happened here. So again I think it was People were asking for the collateral. They said, well, let here are shares of dairy bit and somebody in the company Didn't do due diligence and go back and say Well, it's not just you that owns these shares of dairy bit We need documentation that the other shareholders are okay with you giving up all these different shares because you don't own All of those shares. So let's go back give us that paperwork and then we'll do a business It's tough to push back. But if you don't do it things like this will happen So it's important that everything you see from now on make sure you push back a little bit so Move on the firm seems to have promised the same chunk of locked up gbtc to server several lenders We suspect that three arrows attempted to pledge some pieces of collateral to many people at once Some uh, sam bachman freedom c of ftx in february three arrows took its big swing It put 200 million into luna Then early may luna collapsed to zero wiping out more than 40 billion in a matter of days And this is what's crazy Three arrows holding a luna once roughly half a billion dollars Was suddenly worth 604 bucks Edging on from 500 million dollars to about 600 bucks in a matter of Oh days hours to days Scott odell any executive of blockchain Which are the firm to check in by the size of luna hit after all the luna luna agreement Strictly that three arrows notify the company if it experienced an overall drawdown of at least four percent And uh 30 c said was not that biggest part of a portfolio holdings anyway We didn't hold that much, but they did they lied A few hours later odell informed zao that it would need to call back a significant portion of its Quarter of a million a quarter of a billion dollar loan and would take payment and dollars or stable coins Whichever they want to do and zao said, uh, I don't really Can't do that and he says yo, um something like that And a few days later, they were starting to boycott blockchain once that happened We knew if something was wrong zoo and davis used the whole regular pitch means on zoom and they just let that go Zoo and davis played it cool as they called up seemingly every wealthy crypto investor They knew asked to borrow large quantities of bitcoin Often the same hefty interest rates the firms always had they were clearly pumping their prowess as a crypto hedge fund After they already knew they were in trouble Three arrows was scrounging for funds just to pay its lenders back Davies told charles mcgraft chief strategy officer blockchain. They were trying to get a 5 000 bitcoin loan Then worth 125 million from genesis To give to yet another lender To avoid liquidating positions Barring from peter to pay paul and also just remember this There was also another lender A centralized exchange called celsius and celsius was also in that in that little pot at that around that time When the court file links came in this this on july 21st It was revealed that celsius had given 75 million to three arrows capital And it's just one of those other places where we talk about contagion Genesis global issued 2.3 billion in loans three arrows capital And who knows they're ever going to get that back. So again, how much is this going to affect time will only tell Three arrows position was so large that effectively being to tank the broader markets All the scrambling to sell and meet margin calls by 3ac Panicking investors push prices down clients that have further declines and a way to go is a big Gaining effect crypto park crypto markets Went from three trillion dollars to under a trillion In a matter of months and three arrows final days the partners reach out to every wealthy crypto whale They knew tomorrow more bitcoin The top crypto executives and investors from the u.s. The caribbean to europe They believe 30c found willing lenders of last resort among organized crime figures Owing such characters large some of the monies could explain why zoo and davis have gone into hiding After the collapse Execs at crypto exchange began comparing notes. They were surprised learning that three arrows had no short positions Which has stopped hedging which is the same that they did before The very thing to maintain was the cornerstone of its strategy Investors and exchange executives now estimate that by the end 3ac was leveraged around three times its assets But some suspect it could be magnitudes more So Three arrows kept all the money in commingled accounts taking from every pot to payback lenders that meant that 3ac ignored margin calls and ghosted Lenders in min june including fdx and genesis liquidated their accounts not realizing they were also So fdx and genesis liquidated their accounts not realizing they were also selling assets That belonged to 3ac's partners and clients Which I can see is why everything was just going round in a big circle The voyagers the celcius the all the different places eight blocks capital They were all Lending and liquidating and lending and liquidating Three arrows capital fire for chapter 15 bankruptcy at the process for foreign companies on july 1st As creditors rushed to father claims 3ac's founders had already beaten them to it The first person line was zoo who on june 26 followed a claim for five million Davies wife kelly kylie chen claimed she lent the fund close to 66 million But the only documentation they had to back up their claims were simple Self-attested statements that did not specify When the loans have been made or the purpose of the funds And to finish up the authorities are also taking closer look at three arrows monetary authority of singapore The country's equivalent of the sec is investigating whether 3ac Which has already reprimanded for providing false misleading information committed further breaches of its regulations in the u.s The sec attorneys are now being copied on all three arrows court filings So that's in a nutshell and that was a little bit long, but you have to understand This time goes on people are just going to say 3ac I know one's going to have any context to it. They're not going to talk too much about it or what exactly went on I just want people to remember that just because Somebody made a call right one time or just because there is a certain amount of clout doesn't mean anything You have to look behind the story you have to look behind the person behind the company And really do The digging that you should should be doing this whole time And it's why we have these rules up which you can find right here very simple The rules are five and they work for me. You can modify them any way you want to but for me Don't invest more and you can afford to lose just assume. It's all gone And if you do that you won't feel so heavy if you have to make a decision of Spending $20 on an investment and think well, that's all gone Probably not a big deal But if you say maybe I should sell my house my wife and my kidneys to buy more of this Asset And you realize it could be all gone. Maybe it's a sign not to do it Also, believe everything's a scam everything's a scam until proven otherwise You have to verify don't trust don't leave anything on exchanges Everything should come off in the cold storage as fast as possible Don't use leverage like these guys the fastest way to ruination. There's three else There's ladies liquor and leverage if you're a guy and mostly just come down to leverage don't 25 or 50x It's a recipe for disaster. The last one is take profits. I believe everyone broke taking profits That's what it all comes down to. So look I was a little long I hope you enjoyed it and uh, maybe in a couple years someone will see this and go Okay, that's exactly what happened and I see the same thing that happened before It's happening today in 2025 or 2029 or 2034 Anyhow, thanks so much for watching. I do appreciate like this video give it a thumbs up consider subscribing That's it for today. So thanks so much for stopping by do appreciate it. I'll see you on the next one