This week saw the dramatic arrest and criminal charging of Bill Hwang, the former manager of the private hedge fund Archegos Capital Management.
There’s a fascinating discussion to be had about whether what Hwang did was full-blown fraud, but I won’t bother trying to outdo Matt Levine on that front.
That buying itself helped push the stocks up, giving Archegos paper profits that it could use to borrow more money – which it then used to buy the same few stocks, pushing them up further.
One of the pillars of the fraud case against Hwang is that he lied to banks about these levels when borrowing money.
I’m speculating, but it seems very plausible that Archegos’ own aggressive buying contributed to the insane runup that motivated the sale of new stock.
With its high levels of concentration and leverage, that 30% drop in a single stock wound up being enough to earn Archegos the world’s worst margin call.
In many cryptocurrency ecosystems, token holders are in much the same position as the banks that lent to Hwang: at risk of being trapped in a token as it burns down around them.
The Luna team is working to diversify that backing to avoid the kind of concentrated risk that nuked Hwang, but their current goal would get them all the way up to three different assets by adding BTC and AVAX.
Another suggestive parallel here is with the mechanics of crypto valuations in general, particularly when it comes to founder rewards, pre-mines or other large pools of tokens held in relatively static blocks.
And both, though for different reasons, can lead to retail investors getting their faces ripped off: If you saw ViacomCBS spiking in March of last year and bought in, you wound up being Bill Hwang’s exit liquidity as he torched it from $97 down to $48 in just seven days.
That was in turn enough to knock nearly 18% off Credit Suisse’s stock price in a matter of days after Archegos fell.
Bill Hwang may be a criminal, or he may have simply been playing the Wall Street game according to a set of unwritten but accepted rules – after all, in this day and age, cheating and lying are practically qualifications for working in high finance.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies.
As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period.