Brief Reflections
It’s been a while since I’ve actually written something directly about crypto markets, but since things have been more interesting than normal lately and everyone who survived 2022 pivoted to becoming a lifestyle account or simply lost interest in the space like Cobie, I figured it could be fun to change it up and write a bit more practically instead of droning on about the history of money or whatever it is I’ve been doing to occupy my mind while I pray markets grind up.
When looking back on the past 12 months, there are three events that really stand out, all of which rewarded you for being a midwit.
The May 2022 Luna Collapse
July 2022 3AC Liquidation
November 2022 FTX/AR Insolvency
Essentially, nothing else mattered as long as you were able to survive those three events, especially if you bid beta after the events concluded. Let’s go through them all one by one.
Luna Collapse
Luna was a stablecoin ponzi modeled after ESD, Basis Cash, and other “discount tokens” that essentially attempted to construct a stable unit of account/store of value with financial alchemy, all the while paying out 18-20% interest to depositors. This eye popping yield was originally supposed to be relatively sustainably sourced from other PoS chain rewards, but what was effectively the central bank of Luna made the critical mistake of keeping interest rates unsustainably extremely elevated over the normal market rate, which attracted massive inflows (in particular from large CeFi entities) into the protocol until the bubble burst and wiped hundreds of billions of dollars from the combined cryptocurrency market cap and took nearly 30% of combined DeFi TVL with it. The event was eerily reminiscent of a central bank running out of gold reserves when the global economy still operated on the gold standard, though Luna was in the process of converting to a BTC reserve system at the time of its collapse.
Why did the Luna Collapse reward you for being a midwit?
Luna had strong backing from a variety of wealthy participants in the space, including Jump Trading, and Jump trading actually appeared to clip in tens or hundreds of millions of dollars of positions into Curve pools on the day of the Luna collapse in an attempt to preserve the project and their investments, though it is unclear what the exact positions they were taking were. Additionally, if you attempted to short Luna on-chain on some smaller venues like Drift Protocol on Solana, your counterparties blew up and you never saw a penny. Plus, obviously, if you attempted to simply ape the protocol given it’s large financial backing, historical success, and cultural presence, you ended up getting wiped.
3AC Liquidation
3AC was a large, cryptocurrency focused, hedge fund founded by Singapore based FX traders Kyle Davies and Su Zhu who defrauded creditors and ultimately lost their entire AUM doing a handful of stupid trades, most notably the GBTC “““arbitrage””.
Why did the 3AC liquidation reward you for being a midwit?
At the time of its collapse 3AC owned an extremely large stETH position. stETH is a derivative of Ether, and at the slight risk of oversimplification it can be understood as a forward delivery contract for ether that pays a carry of around 3-4% apy. Crucially, at the time of the 3AC collapse, the delivery date of stETH was unknown- it was almost certainly going to be within the next year, once the shambalah upgrade released, but it could have been as much as two years before these forward delivery contracts could be settled back to spot.
At the time of the 3AC liquidation, their liquidators (or Kyle and Su themselves) were forced to rapidly unwind the oversized stEth position. stEth began to trade massively off par, no matter what (reasonable) discount rate one employed. 3AC even almost set off a liquidation chain reaction as their sell off prompted other leveraged stEth holders to liquidate.
In the end, stEth briefly traded below a .88 ratio against Eth, far below fair value. If you did not suck up a loss and liquidate your stEth positions early into this process, you could have easily gotten liquidated down at the lows. Prudent risk management carried the day, not just for leveraged retail traders but also DeFi money markets, especially since the liquidation chain was almost much worse than what actually occurred.
FTX/AR Collapse
FTX was a well regarded CEX founded by Jane Street alum Sam Bankman Fried in 2019. Due to fraud, poor accounting, or some combination thereof, the exchange collapsed in November 2022 and took the large (related party) Alameda Research down with it.
Why did the FTX collapse reward you for being a midwit?
Panicking early carried the day in the FTX collapse- depositors who fled at the first sign of trouble were saved, while other left curvers completely asleep at the wheel under the assumption that FTX was competent and incapable of failing lost all or most of their money. Additionally, “right curve” hedge funds like Galois Research found themselves pinned on the exchange and unable to withdraw in size, though this cannot necessarily be blamed entirely on them.
Other attempted right curvers bought FTX deposits at 20-50% discounts and will likely never get their money back, definitely not once they account for opportunity cost.
PepeCoin
PepeCoin was a shitcoin that released several weeks ago and has now run several hundred or thousand x from when I first heard of it. Alas, I had learned to fight the previous wars- I successfully navigated all three of the previous events, but I could have a couple hundred k at least by closing my eyes and clicking on Pepe at the right time with some dust.
Pepe tokens run is a bitter reminder that no trading style or pattern can work over long periods of time, whether you be long beta or theta or shitcoins or anything else.