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Should Traders Trust a Crypto Exchange Launched by Bankrupt Hedge Fund Founders?

4 mins
Updated by Geraint Price
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In Brief

  • The Terra Luna crash was the preceding event that brought down Three Arrows Capital (3AC) last year.
  • The collapse of the crypto hedge fund left $3.5 billion owed to over 20 different companies.
  • Despite this setback, Zhu and Davies announced in January their plans for a new exchange, OPNX.
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Three Arrows Capital founders Su Zhu and Kyle Davies are launching a new exchange called OPNX. But can, and should, traders trust it?

To put it mildly, Su Zhu and Kyle Davies, the founders of Three Arrows Capital (3AC), are controversial figures in the crypto industry. Three Arrows Capital, their hedge fund, was founded in 2012 after the pair met at Columbia University. 3AC subsequently became one of the most successful crypto hedge funds in the world. As recently as March, it managed over $10 billion in assets.

However, when the USDT peg was broken, leading to a significant liquidity crunch across the market, 3AC was unable to meet its margin calls and declared bankruptcy in July 2022. Among the reasons for the decision was its inability to repay a loan from Voyager Digital. It also invested heavily in Bitcoin, Ethereum, and other cryptocurrencies. All tanked in price following the USDT depegging.

The collapse of 3AC became one of the most dramatic dominoes to fall in 2022. According to court records, the fund’s debt to over 20 different companies amounts to $3.5 billion.

OPNX Will Sell Tokenized Bankruptcy Claims

In July, announced losses from a Three Arrows Capital loan totaling $270 million. Other major creditors to 3AC that lost out included BlockFi, Genesis, Deribit, and Finblox. 

In short, 3AC bet the house on prices going up, borrowing money to reinvest in other projects. But when the market tanked, so did their strategy. 

Despite this setback, Zhu and Davies announced in January their plans for a new business venture. Their latest project is the OPNX exchange – or Open Exchange – which has just completed a successful funding round. The pair have reportedly raised $25 million, but Davies has not disclosed who the investors are.

The exchange has one big difference. It will be the first marketplace for trading in bankruptcy claims from other crypto companies. Back in February, the marketplace officially opened its waitlist for users who wanted to sell their claims.

New Exchange Will Use FLEX Token

The exchange plans to acquire all the assets of the troubled exchange CoinFLEX, including its people, tokens, and technology. The FLEX token will become the new exchange’s token and will be used to pay fees on the platform, much like how BNB is used to pay fees on Binance. 20% of the revenue generated will be used to buy and burn FLEX tokens.

According to CoinFLEX’s blog post, the acquisition is part of OPNX’s restructuring plan, which was approved by a court in Seychelles on Monday. The new OPNX exchange will be, for all intents and purposes, a rebranding of the CoinFLEX exchange under new leadership, with the added unique selling point of tokenizing bankruptcy claims.

Unsurprisingly, the new exchange has caused some debate among the crypto community. However, their previous strategy of overzealous borrowing has not put off every observer. One Twitter user called their strategy to tokenize bankruptcy claims “one of the most innovative ideas in crypto right now.”

Not everyone thinks the approach of OPNX is in good taste. Their highly leveraged strategy was indirectly responsible for wiping out billions of value from the crypto market. Not only did they declare bankruptcy to protect their assets, but their behavior triggered several other bankruptcies in their wake. On the company’s official Twitter, they said they believed “all assets classes should be tokenized, accessible and tradable at fair prices on order books.”

“Nobody will trust an exchange that is funded and run by a bunch of disreputable people looking to make a buck off of the misery of people who have lost everything,” said one Twitter user. “We all know some businesspeople lack morality, believing money trumps all, but this venture is especially crass.”

Potential Investors Must Weigh Risks

The project’s token, FLEX, has been trending upward since it came from nowhere in the middle of January. At the time of writing, it is currently worth approximately 2.80 USD, nearly 90% more than it was a month ago. The FLEX token is currently available on Uniswap, SushiSwap, and MEXC.

Aaron Rafferty, CEO of Standard DAO, believes that while the 3AC collapse set off a “Lehman Brothers Moment” in the crypto world, we should recognize their approach “albeit risky, was transparent,” he said, speaking to BeInCrypto. “Unlike the notorious FTX bankruptcy, they did not intentionally deceive their stakeholders. Nevertheless, the magnitude of their losses remains daunting, given their inability to identify the risk that was inherent in the Terra/Luna ecosystem.”

“It’s no question that Davis and Zhu have a knack for attracting capital, and OPNX will likely be no exception. Yet, despite their potential learnings from previous crises and the unique value prop they are positioning, the question of trust remains. With a market still reeling from the collapse of giants like Three Arrows, Celsius, FTX, BlockFi, and Voyager, potential investors must weigh the risks before placing their bets on the OPNX exchange.”

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Josh Adams
Josh is a reporter at BeInCrypto. He first worked as a journalist over a decade ago, initially covering music before moving into politics and current affairs. Josh first owned Bitcoin in 2014 and has followed the space ever since. He is particularly interested in Web3 adoption, policy and regulation, CBDCs, privacy, and the future of the metaverse.