Just a few days before hedge fund Three Arrows Capital was liquidated across several crypto exchanges, its affiliated over-the-counter trading firm pitched investors on a new opportunity.
According to investment documents reviewed by The Block, TPS Capital — which is operated by Three Arrows' Su Zhu and Kyle Davies — was pitching investors on an arbitrage opportunity that involves Grayscale's bitcoin-linked fund GBTC.
"They pitched to so many people," said a person familiar with the trade pitch.
Another source, who shared the investment deck, told The Block that the Three Arrows team began circulating the deck on June 7, noting that, in hindsight, the pitch was perhaps a last-ditch effort to save the company after a series of crypto bets soured.
As for the arbitrage opportunity, the firm said that Three Arrows could lock up BTC with TPS for 12 months and receive a promissory note in return for the bitcoin.
Three Arrows is known for being one of the biggest investors in asset management firm Grayscale's Bitcoin Trust (GBTC). Grayscale is seeking approval from the Securities and Exchange Commission to convert GBTC into an exchange-traded fund, with a decision pending by early next month.
Three Arrows' pitch was to structure a trade for counterparties that would offer the upside of the discount collapsing as the deadline neared for the SEC decision. GBTC currently trades at a 33.75% discount to the price of Bitcoin, which it is meant to track.
"Upon conversion (GBTC becomes and ETF and GBTC can be redeemed for BTC) clients receives 1.x BTC minus our 20% performance fee."
"In case of no conversion even within 12 months, the client will receive 1* (Y end - Y start)," the note reads. "Y = GBTC discount % at that time."
"Any widening of the discount would be absorbed by the investor's principal."
James Seyffart, an ETF analyst at Bloomberg, said that the deal would make Three Arrows money regardless of the outcome of the SEC's decision.
"In traditional finance, they call these structured notes," Seyffart said. "But they were gonna take ownership of your Bitcoin while also making money on your BTC no matter what happened. They get your BTC and they take money/return from the investors in either scenario."
A pitch by the firm to investors described the opportunity more directly: "All you have to do is post BTC and we'll run with the rest."
As The Block first reported, Three Arrows faces potential insolvency after it was liquidated across several exchanges and by several lenders.
Davies and Zhu told The Wall Street Journal that the firm is "hoping to reach an agreement with creditors that would give it more time to work out a plan." The firm is still currently operating. Creditors include firms like BlockFi and Genesis.
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