3AC and BlockFi Made The Same Exact Dumb Trade And Seem Headed For The Same Dumb Place

(That place is Hell)

The Three Arrows Capital three bro bronity in their temple.

WHERE THEY ARE NOW?

(I have no idea, actually, but this series will continue over at Substack.)

FOREWORD

This is a story about crypto bros. Flashy crypto bro jackasses taking unbelievably stupid risks with your grandma and grandpa’s money, and maybe your money too. “Risks” isn’t even the right word. There are risky investments out there but these folks just set everyone’s magic beans (some call them “Bitcoins”) on fire for some short term paper gains that turned out to be staggering losses when the bill came due.

Welcome to the new world order, where the digital future will be owned by empty worshippers of Mammon with a lambo in place of a soul. Two lambos, even. That’s how big the hole in their soul is. (Crypto bros have a thing for lamborghinis, which they call in their ultra casual yet ultra douchey lingo, “lambos”.)

EXCUSES SECTION

This is not gonna be a pretty post. It’s late and I just created this Medium account because posting complicated stuff like this on Twitter is untenable. I just used Twitter for the first time on Sunday to blog the crypto collapse and only started reading Reddit two weeks ago. I basically have no idea what I’m doing with social media apps.

Follow this medium account though and I promise you’ll get something better later, when I’m better rested. People are going to be shocked by how depraved the cryptocurrency industry is, I assure you. Stories like this are really just society’s first glimpse of the lumbering evil that has been growing and building strength like Grendel at the bottom of a sea of GPUs for years at this point. There’s still time to stop it but not much. This Grendel already devoured two United States Senators and it’s sure to devour a few more.

PLAIN ENGLISH EXPLANATION OF WHY THREE ARROWS CAPITAL (AKA “3AC”) WAS RUN BY JACKALS (REALLY DUMB JACKALS)

• Grayscale Bitcoin Trust was created by a company called Grayscale. Think of Grayscale Bitcoin Trust like a box of Bitcoins.
• Grayscale created a piece of paper with the letters “GBTC” on it that you could buy on the stock market in order to pretend you were cool enough to own one of the Bitcoins in the box. Buying Bitcoins used to be kind of hard and people were lazy but they heard about this magic internet money and they wanted in; GBTC facilitate this. This “investment advice” website sums it up well:

• If you gave Grayscale 1 Bitcoin they would give you 1,000 of these pieces of paper.
• You could also buy and sell these pieces of paper on the stock market. (OTC, for those who know that that means. If you don’t know that means it just means “the kind of shady part of the stock market.”)
• Because of the SEC’s skepticism about Bitcoin, GBTC was only allowed to be created as a temporary speculative vehicle and not as a way to actually trade Bitcoins on the stock market. As a result, if you put a bitcoin in GBTC it stays there. Forever. It’s like a bitcoin black hole — coins go in, coins don’t come out.
• This state of affairs will persist until Grayscale gets the SEC to approve it to convert itself into a more legitimate way to buy and sell Bitcoins on the stock market, at which point one will be able to redeem 1,000 shares of GBTC for a bitcoin. Until then owners of GBTC just have a piece of paper that says they own some Bitcoins that are locked in a box they can’t open, which probably isn’t the cryptographically lubricated future of money they were hoping for.
• GBTC is technically an “ETF” — an “Exchange Traded Fund.” I don’t understand the different kinds of ETFs but one kind is a box that lets you take stuff back out the other doesn’t let you ever take stuff out. You can see therefore how these are very different kinds of boxes. If you want to know the details, Amy Castor, one of the very few journalists covering this cryptocurrency shitstorm well, did a deep dive you can read to understand. (While I’m here: if you own crypto and you think CNBC, WSJ, or the New York Times are telling you much of anything true about crypto, you have been misinformed and you will probably lose all your money on account of it. Pay attention to actual journalists like Amy and you might get out alive.)
• Because of investor interest in BTC back in 2019–2020 the price of 1,000 shares of GBTC started trading at up to 37% more than the market price of 1 Bitcoin. This premium arose because Bitcoins were not the easiest thing to buy. You had to deal with long hexadecimal based cryptographic keys and weird Bitcoin exchanges. Worst of all, you might have had to ask a crypto bro to help you figure it all out.
• As an example, let’s say 1 Bitcoin cost $1,000. 1,000 shares of GBTC (representing theoretically the same amount amount of Bitcoins — 1) at some point were trading hands for as high as $1,370.
• The arbitrage was to buy lots of Bitcoins, put them in the GBTC box to get the paper shares of GBTC, and declare the profits. You instantly made 37% returns on paper so this was a very attractive trade. Makes you look like a very smart young man to make 37% overnight. A man who understands mathematics. And computers. Of course you couldn’t get those Bitcoins back out until the SEC approved the ETF change. But that was just a regulatory speed bump that could be finessed later on, much like Uber had finessed taxi regulators in almost every city.
• If you were BlockFi, you didn’t even have to buy the Bitcoins to exchange put into the GBTC box. You could just take your depositors’ Bitcoins and put them in the box.
• 3AC and BlockFi both pumped huge numbers of dollars into the trade, locking Bitcoins currently worth ~$1.3B and at times worth over $2B in the GBTC vault. I can only assume they used the huge 37% paper return to convince rich people to give them a bunch of money. 3AC for a hedge fund that “invests” in cryptocurrencies, BlockFi for a cryptocurrency “bank.” (You should be very scared of these scare quotes.)
• At some point the ownership of shares of GBTC looked like this. Everyone gets a lambo:

• But then… the SEC rejected the attempt to change the nature of the ETF and allow the Bitcoins to come out of the box. Not just once but over and over. Other people tried to make their own boxes of Bitcoins and convert them into a redeemable ETF situation. The SEC said no to them as well. Repeatedly. Some of these conniving sociopaths even tried to get the SEC to approve something called a “carbon neutral Bitcoin ETF.” My eyes may have never rolled harder.
• The SEC named the fact that Bitcoin prices were tied to Tether, AKA the greatest financial fraud of all time (Bloomberg) and one that is still very much under way as I type this, as a reason. This is as far I am aware was the first time SEC called out Tether by name. May there be many more callouts to come, and soon, inshallah. And if I’m wrong about it being the first time, I apologize. I don’t make a habit of reading SEC rejection letters. Or really anything the SEC puts out. A publishing house that’s been around 100 years and hasn’t produced even a single page turner is hard to get excited about.
• Over time, the arbitrage opportunity became less and eventually turned negative as the market came to believe that the SEC might never allow anyone to take the Bitcoins back out of the box. 1,000 shares of GBTC became worth significantly less than 1 Bitcoin. Right now, for instance, 1 Bitcoin costs $22K but 1,000 shares of GBTC are worth at most $12,500. In other words, not much more than half. Which means… BlockFi and 3AC seem to have lost millions. Hundreds of millions. Roughly $600M compared to where they’d be had they held the Bitcoins instead of the shares. They can’t get the Bitcoins out of the box and no one was that excited about buying the pieces of paper 3AC and BlockFi were that said they own the bitcoins because the pieces of paper could notbe used to get the Bitcoins out of the box.
• As of March 31st, 2022 3AC seems to have held enormous positions in GBTC, amounting to 38,888 Bitcoins.
• As of June 17th, 2022 3AC is bankrupt and has had its positions liquidated. The technical term for this state of affairs is “rekt.”

• In May, Terra/Luna collapsed. If you lived through capitalism’s epileptic seizure in 2008, it may be helpful for you to understand that this was decentralized finance’s Bear Stearns moment, after which things seemed kind of like they stabilized but actually a slow moving earthquake had begun. You can be extra sure it was such a moment because CNBC published a piece by some knuckle dragging money fucker telling you that it definitely was NOT crypto’s Bear Stearns moment and CNBC is wrong about literally everything. That earthquake has kicked off a chain reaction that has so far shown three companies that were obvious scams all along to have been… obvious scams all along. Terra, Celsius, and 3AC have all collapsed. It will not end here.
• Seems likely, although not certain, that in the Terra/Luna panic people tried to pull out BTC from BlockFi because they were feeling unsafe and just didn’t want to own any magical internet money given that $18 billion of a bunch of other people’s magical internet money had somehow just… vanished. Overnight. All crypto experienced a pullback, which is understandable. People were starting to understand that they had entrusted large amounts of their wealth to young men who don’t actually understand mathematics but look like they might. Look what happened to the value of GBTC on the dates of the Terraclysm, for instance:

• This part is speculation, but it’s speculation based on very convincing trade volume charts. It’s also based on the fact that Bloomberg tells us 3AC held the shares as of March 31st and BlockFi as of January 31st.
  GBTC usually trades a few million shares a day. Thus when volume spikes up to 10–13 million shares a day, I suspect that 3AC dumped tons of shares of GBTC on the market in a fire sale to raise capital, crashing the price.

• UPDATE: We now know for sure that at some point prior to June 17th, 2022, 3AC liquidated, as the Bloomberg data has been updated.

• Two days ago the CEO of BlockFi, Zac Prince (which I have do say is close to the perfect crypto bro name, expressing both maximum casual and maximum amoral hunger for money in only two syllables) went on Twitter to calm his customers’ nerves by telling them BlockFi had no exposure to GBTC shares because they “exited the principal position last Fall”. This is very curious given that some views of SEC records show they held the shares on March 31st. A trading platform view shows they exited in January. Neither of those are “last Fall,” though it’s probably not a coincidence that “last Fall” was Peak Crypto. Oh, and there’s also the matter of the $100M fine the SEC slapped on the company in February for selling illegal securities, as well as last week’s capital raise which valued them at a single billion dollars, considerably less than the $3 billion they were valued at recently. These are all bad things, if you’re a company. Every down round is more painful than the last. Sooner or later the company goes bust or the founders get removed.

• Meanwhile Grayscale, the company that runs the GBTC Bitcoin Box, has been fighting and fighting (and fighting) to get the SEC to allow Grayscale to sell something to customers that the SEC thinks is a harmful product.

• As far as 3AC, as of March 31st they still had GBTC shares. If they hold those shares [update: 3AC got liquidated at some point, probably around May 10th when Terra/Luna collapsed] now they are look at a roughly $800M loss — Actually probably much larger, because there’s no market for GBTC shares. 3AC owns like, most of the outstanding shares, so shares will go close to $0 probably when they dump. So could be a $1.2–1.6B loss. At least it wasn’t their own money. Maybe they can fix it with a pivot: minting a “3ACThrewMyMoneyInAFireCoin.” Crypto-cultists would definitely buy it; these people will buy literally anything as long as it ends in “Coin.”

tl;dr: 3AC and Blockfi bros made a trade that got them short term paper gains but assumed the SEC would one day think Bitcoin deserved to be treated like a legitimate commodity despite Bitcoin actually being a demonic computerized entity that is rising from offshore server farms on the edges of the internet. Basically dared the SEC to fuck them up. SEC fucked them up because SEC said the price of Bitcoin seemed to be related to (among other things) the large quantity of fraudulent Tethers floating around.

Let’s give the SEC a round of applause here, seriously. They have been slow to act but it has been a bit unclear who is in charge of these demonic coins. Here they had a chance to do the right thing and unlike almost every other politician or glassy eyed “journalist” in this country, they got it right.

3AC and BlockFi basically tried to do an Uber past the rules and got squashed like a bug.

This is not the first time that young men who don’t actually understand mathematics but look like they might manage to make a notional $1.2 billion dollars of other people’s money just… disappear. And it won’t be the last, not even this year.

THANKS YOUS

The first half of this puzzle was researched by u/zipzoa over on reddit. Because I had read the deep dive on GBTC by Amy Castor a few weeks ago something stirred in my brain and I remembered that Bitcoins that go into GBTC do not come out. You should really read it; she has all the details. Google did the rest.

[HAIL TO THE HEXAGON SUN AND THE PRISMATIC MOON]