How a Crypto Giant Lost $3 Billion in 72 Hours — What Went Wrong

When Three Arrows Capital (3AC) imploded in 2022, it sent shockwaves through the entire crypto industry. But this wasn’t just one fund’s failure — it exposed a systemic problem that nobody wanted to talk about: unchecked leverage in a market built on speculation.

The Setup: A House Built on Borrowed Money

Su Zhu didn’t start as a household name. In 2012, he was a trader at Deutsche Bank, working within traditional finance constraints. By 2021, everything had changed. 3AC had amassed billions in assets under management, positioning itself as crypto’s most influential hedge fund. Zhu made bold bets on market cycles, and for years, it paid off spectacularly.

But here’s the catch: the strategy wasn’t actually sophisticated. It was simple and brutal. 3AC borrowed aggressively from multiple lenders — BlockFi, Voyager, Genesis — then used that borrowed capital to make even bigger bets. The arithmetic was straightforward: if markets kept climbing, everyone made money. If they didn’t, the whole structure would implode.

The fund was managing:

• Capital from billionaire investors
• Assets held in trust from other hedge funds
• Market bets that seemed sophisticated but were fundamentally dependent on one thing: continued bull market momentum

The LUNA Disaster: When Leverage Meets Volatility

3AC had committed $500 million to LUNA. When that project collapsed in 48 hours during the 2022 crash, it wasn’t a mere loss — it was a trigger event. The liquidation cascaded through the entire system.

What followed was predictable but catastrophic:

• Collateral positions evaporated
• Multiple creditors demanded repayment simultaneously
• Asset prices spiraled downward as forced selling accelerated
• Bitcoin and other holdings plummeted in value

Su Zhu disappeared as the pressure mounted. The fund couldn’t meet margin calls. Lenders initiated liquidations. The timeline compressed from “profitable hedge fund” to “complete insolvency” in just three days.

Why the System Failed

The collapse of 3AC revealed three critical failures:

Absent risk management — No meaningful limits on position sizes or leverage ratios

Extreme leverage concentration — The fund was operating on borrowed money stacked upon borrowed money, with no circuit breakers

Total opacity — Investors, lenders, and even the broader market didn’t understand the interconnectedness of these bets

This wasn’t entrepreneurial boldness. It was a mathematical certainty waiting to happen. In a bull market, leverage looks like genius. The moment volatility arrives, it becomes a death sentence.

The Domino Effect: Industry-Wide Consequences

Three Arrows Capital’s failure wasn’t contained. It triggered:

• Lending platforms facing massive defaults
• Other hedge funds suddenly unable to access credit
• A broader loss of confidence in unregulated crypto finance
• Thousands of investors discovering their assets were locked in failing platforms

Bitcoin and the broader crypto market absorbed the shock, but the psychological damage persisted.

What This Teaches Us

Su Zhu’s story from $3 billion to zero is perhaps crypto’s most important cautionary tale. The lesson isn’t that leverage is always bad — it’s that leverage without risk management and without transparency is a guaranteed path to destruction.

The crypto market had evolved rapidly, but its risk infrastructure hadn’t caught up. There were no circuit breakers, no position limits enforced by the system, and no transparency requirements that would have signaled danger to outsiders.

Today, BTC trades at $87.07K, having recovered significantly from 2022 levels. But the memory of 3AC’s collapse remains — a permanent reminder that in crypto as in traditional finance, hubris and leverage form a dangerous combination.

The warning is clear: sustainable growth requires discipline. Explosive leverage only works until it doesn’t.