Lessons From the Crypto Contagion

Elucidating to those close around me that hundreds of billions of dollars are being evaporated from the collapse of supposedly "smart" institutional investors in fake internet money seems alien. And I don't blame them.

The 2018 bear market was caused by retail getting burnt. While this time around, it's caused by institutions getting burnt. The two cannot be rationally compared.

In just the last month, Luna went to zero, Celsius went under, and now 3AC is getting margin-called.

But that's just touching the surface of the contagion. Many funds lost 90% of their capital, and even Coinbase has had to fire 20% of its employees and rescind a great deal worth of job offers.

In this trend toward maturation, people blindly thought that all the institutional money entering the space was the new smart money. While this has primarily been the case (Alameda/SBF/CZ are great examples), there are blatant exceptions.

The collapses we've witnessed over this period only serve to remind us that these big players are susceptible to the same biases as your average retail trader. The only difference is the size.

The biggest parallel I can see between Do Kwon, Su, and Kyle (both of 3AC capital) is arrogance and conviction that likely clouded risk management.

In the case of Do Kwon, he tried to make UST a systemic threat to crypto. He envisioned that by being the largest single holder of Bitcoin, the collapse of the UST would mean the collapse of crypto as a whole. We're lucky he didn't succeed.

As James Bond would say, "History isn't kind to men who play God."

This was a few weeks before Luna went to zero:

And when it comes to Su and Kyle, what if 3AC bull posting wasn't psy-ops, but they actually just turned bullish at every top?

The reality is likely much simpler for everyone arguing that 3AC was psy-oping retail by bull-posting. If Su and Kyle were psy-oping, why are they getting margin called?

Hint: they were long the entire time.

Now, to be clear, I am in no way celebrating these misfortunes. Financial markets are brutal, and there's nothing worse than the guy celebrating people blowing up.

But, equally, it'd be a terrible shame to walk away from this institutional crypto contagion without taking away some lessons.

We're all human beings.

None of us are infallible.

Hell, Su and Kyle were the best 99.99% in crypto and still managed to blow up. That's trading for you; one mistake and you're gone.

Even the biggest (and typically the best) investors in the world suffer from the same subconscious biases that impact us all.

Markets like these only serve to remind us of the importance of risk management that can so easily be loosened in the good times.

There's such strong conviction in crypto and there's little room in the middle.

Ask Ethereum-believers and they'll say Solana's going to zero. Hardcore, libertarian Bitcoin maxis think everything but Bitcoin is going to zero. Ripple believers think it's going to a million.

You see it all the time.

But this conviction is often the undoing of traders and investors, both in crypto and legacy. Conviction, when strong enough, can cloud risk management.

That's what we're seeing taking place in real time.

As the greatest rapper of all time, Kendrick Lamar would say, "Sit down, be humble."

Follow Louis on Twitter @haumicharts.