Published January 18, 2023, 12:27
After losing billions of dollars, can bad traders get a second chance? Prior to FTX and Alameda Research, Kyle Davies and Su Zhu held the title of the biggest bankruptcy of a cryptocurrency trading firm. The former founders of Three Arrows Capital (3AC) are trying their luck again, counting on leniency from investors. They do not change their environment and embark on… the business of bankruptcy in the cryptocurrency industry.
From victims they become predators. They don’t want to launch a trading fund or company but a trading platform temporarily called “GTX”. An allusion to “FTX” to show that, with the “G” after the “F” of the alphabet, their company ushers in a new era. They are hoping to raise $25 million for their project according to ‘The Block’.
It is no longer the 3AC traders who take risks on the markets but the customers of their platform. The latter will speculate on the failures of crypto companies and the likelihood of recovering customers’ money. They will be able to buy or sell more or less dubious debts of bankrupt companies, with different probabilities of repayment.
As with the bankruptcies of FTX, Voyager, BlockFi and Celsius, creditors who want their money back now have to waive their rights to future repayments. In exchange for this immediate cash flow, they must also agree to lose the vast majority of their investment, nearly 90% for FTX clients. If the latter abandon their claims to the GTX platform, they will not receive money but a stable cryptocurrency (or stablecoin) “USDG”, which should be equivalent to the dollar. An additional risk.
This “cryptodistress” business is thriving after 12 months of market chaos. Bankruptcies have claimed millions of lives. Lots of potential customers. The founders of GTX will pocket commissions on these transactions, much higher than the classic purchases and sales of cryptocurrencies. In their commercial documents, they estimate this market on which platforms such as Cherokee Acquisition are already present at 20 billion dollars.
Confident, former traders believe they can become leaders within months of their launch. They claim to have an advantage over existing competing platforms because they are expensive in terms of fees and specialized funds that buy back victims’ credits at discounted prices cannot fetch very large sums. GTX, which has about sixty people, wants to offer lower prices than its competitors.
Three Arrows Capital had managed up to $10 billion before its bankruptcy in July. His assets consisted of the founders’ money and money borrowed from lenders who expected a high return on investment from commercial prodigies. All the “shadow crypto banks” in the industry trusted them and lent them without counting because their downfall was perceived as impossible.
However, their capital fell to $1 billion in July at the time of the bankruptcy. They were $3 billion in debt to various creditors such as Voyager Digital, which also closed. Digital Currency is still awaiting repayment of a $1.2 billion loan. GTX has offered Three Arrows Capital’s creditors to convert their claims into an equity investment in its capital.
Based respectively in Dubai and Bali, Su Zhu and Kyle Davies could still be captured by the American justice and in particular by the Securities and Exchange Commission. This legal risk should cool off most investors.
The Three Arrows Capital alumni project was met with disbelief and skepticism. They left behind a field of still smoking ruins. They had been taking more and more risks and since the May market crash, lenders had wanted their money back. Cryptocurrency traders have had to unwind their positions to recover money and repay their creditors. Because they had the same strategies as other funds and trading companies, they caused massive sell-offs, especially on Ethereum, and exacerbated the price decline.
Three Arrows Capital traders had also borrowed to invest in illiquid tokens which plummeted in value. Like Alameda Research, the trading company of Sam Bankman-Fried, they have gradually slipped into increasingly adventurous bets. They were financed with short-term debt but had long-term investments which they could not sell, being subject to minimum investment periods. 2022 has been a dark year for all traders, not just Three Arrows Capital. Cryptocurrency hedge funds lost 72% according to NilssonHedge, which is based on a sample of 300 funds.