When Crypto’s Own Hedge Fund Geniuses Failed

Cryptocurrencies were supposed to teach traditional financiers a thing or two about how to avoid collapses and crises. Yet it feels like we’re simply repeating history. Specifically, the messy hedge-fund humiliation captured in “When Genius Failed.”

After Terra and Luna’s $60 billion stablecoin collapse and the freeze of withdrawals at crypto-lending platform Celsius, trading firm Three Arrows Capital now appears to be in trouble. The fund is liquidating its holdings amid plummeting prices, and an ominous tweet from co-founder Zhu Su about “communicating with relevant parties” is stirring fears of something potentially more fatal.

A glance at Three Arrows’ past crypto bets — on the likes of Luna and Axie Infinity, as well as Bitcoin and Ether — leaves little doubt that the “communicating” is probably not of the fun kind. The fund, estimated to be managing $10 billion in assets in March, combined Zhu’s derivatives expertise with a kind of beatific conviction in a broad crypto “supercycle” (which he recently admitted was wrong).

That waves of forced selling still seem to be rippling through crypto markets shows how complex and lending-driven this market has become. Traditional finance’s margin calls take on a more brutal form in crypto when smart contracts automatically liquidate positions in quick succession. The current focus is on Three Arrows’ exposure to staked Ether, a token designed to earn interest while Ethereum upgrades its network, which is buckling under heavy selling pressure.

But it also suggests lessons from history are being ignored. This is hardly the first boom-and-bust cycle in Bitcoin or the broader crypto market; this year’s 65% drop in the Bloomberg Galaxy Crypto Index is similar to that seen in early 2018. Yet hedge funds set up to deliver market-beating returns in crypto look blindsided. Average estimated returns for those providing daily data were -24% in April, -32% in May and -28% in June, according to industry database NilssonHedge. A large number of managers have “simply stopped trading,” it says, with the total tracked falling to 325 from 510 in January.