2022’s Most Spectacular Crypto Trading Blowups

Here’s a trio that stood out for the wrong reasons in a record year for poor crypto trading performance.

In 2022, just when you thought crypto couldn’t get any worse, it did. And then it happened. And then it happened again.

It’s been the most difficult year for cryptocurrency traders in a long time. Scores suffered record losses in a matter of weeks or, in some cases, days or even hours. The slaughter extended to the game’s most astute portfolio managers.

In less than a year, the industry faced three 100-year floods. In less than a year, there have been three black swans. (Is it really necessary to go over the disastrous trio for the umpteenth time?)

And the cost of who shut down shop is still being tallied, given that FTX’s bankruptcy is unlikely to be resolved for at least a year. Not to mention the liquidity crises experienced by companies such as Genesis.

On the macro level, 2023 has been a real bear for both TradFi and cryptocurrency traders. They’ve all had to deal with historic inflation and the Fed’s series of rate hikes, as well as high-stakes geopolitical conflicts.

Here are the biggest digital asset buy-side blunders. Sam Bankman-Fried, Alameda’s founder and former CEO, was imprisoned until Wednesday, when the federal judge overseeing the case imposed a massive bail of $250 million. Alameda has declared bankruptcy. FTX has declared bankruptcy. A slew of former executives from both of Bankman-entities Fried’s are also facing criminal or civil investigations.

Because Alameda has long been a closely guarded proprietary trading firm, determining its exact performance has been difficult. In contrast to a hedge or venture fund structure, where limited partners contribute their own capital for the firm’s portfolio managers to put to work, prop trading firms typically run entirely on the money of their partners. As a result, word of Alameda’s various results over the years has been difficult to come by.

However, given the SEC, CFTC, and federal prosecutor’s extensive allegations and related changes — including FTX’s top brass commingling funds with Alameda — it must be far worse.

The abrupt and unexpected departure of Sam Trabucco earlier this year, who served as the firm’s co-chief executive alongside Caroline Ellison, who recently pleaded guilty to a slew of federal charges in the United States, may have foreshadowed how quickly things fell apart.

In November, the long-standing crypto-focused hedge and venture fund firm lost 51% in about two weeks.

The steep drop was fueled in part by a large portion of its assets being held on FTX, including cash, spot assets, and unsettled derivatives. While the firm’s traders were able to recoup a significant portion of the total amount, the damage had already been done.

Multicoin’s results were a stark departure from the asset manager’s typically solid performance showings over the years, as the asset manager has become an increasingly appealing destination for some of the largest crypto investors to park their funds over time. Its investor base is almost entirely comprised of institutional capital, which is no small feat among its crypto peers.

In addition to the FTX’s custody of its assets, Multicoin was hit hard by the market’s rampant volatility following the collapse of the exchanges. It also has a long-standing bullish thesis on Solana’s native token, SOL, which was dragged down significantly in the fourth quarter.

Because of the cryptocurrency’s close ties to Bankman-Fried, who helped incubate related ecosystem projects like the startup Serum.

In retrospect, Three Arrows had a lot in common with Archegos, Bill Hwang’s family office that also imploded a couple of years ago.

Archegos was essentially using a series of derivative swap trades to hide how much leverage Hwang and his team were actually using — hint: a lot — from the Wall Street prime brokerages that extended that margin to the family office. As a result, Archegos was able to amass an absolutely unprecedented portfolio of around $100 billion, not counting the enormous amounts of leverage Hwang was able to wrangle.

Three Arrows, like Archegos, concealed how much exposure to markets — cryptocurrency, in this case — it really had and how much leverage it used. It, too, proved to be quite a lot.

Three Arrows, led by co-founders Su Zhu and Kyle Davies, had amassed a staggering amount of debt from crypto lenders and prime brokers in order to fund a series of astonishingly over-leveraged trades.

The firm’s story, if not that of Zhu and Davies, ended with a massive liquidation.