This crypto startup firm, Uprise, lost 99% of its client funds while shorting Luna during its price crash. Luna crashed 99.98% within 1 week from Thursday, 5 May 2022 to the following Thursday, 12 May 2022. Just 1 week ago, Luna's market capitalization was USD28 billion. 1 week later, this USD28b crashed by 99.98%. This is the fastest and biggest price crash in crypto history. A short-seller who shorted Luna should be making huge sums of money in quick time. Yet, Uprise lost 99% shorting Luna. How can this happen? The answer can be found in the hourly price chart of Luna. Luna surged violently by 708% within an hour from 13 May 2022 10 am-11 am Singapore time. I guess this is the hour that pretty much killed Uprise. Even if Uprise survived this hour, there were several other hourly intervals when Luna surged above 100% and even 300%. Short-selling in a strong bear market is dangerous even if you get the direction right because bear markets have very violent rallies. The most a short-seller can earn is 100% but he can lose several 100%, sometimes in a short time. It is quite easy to be killed quickly if what you shorted surged more than 700% within an hour. There is little time to react if the security you shorted surged multiples of 100% within an hour. This can even happen when you are sleeping if it trades round the clock like crypto or futures. This is less of an issue for machine algorithms than for humans. Since Upsize runs on machine algorithms, it should be fast enough to exit but I guess the position size was too large and there wasn't enough exit liquidity. Uprise employs Artificial Intelligence trading strategies. These strategies are developed based on historical data. Machine learning strategies will fail for rare events because there is not enough data to train the algorithms to cope with these rare events. Here are some risk-management lessons that I extract from this fiasco. Lesson 1) Watch position size relative to liquidity. If position size is too large and liquidity is not deep enough to exit fast, the violent price reversal will kill you, especially in a bear mark rally. Lesson 2) Algorithms based on Artificial Intelligence need to recognize when the market enters into rare situations where the algorithms are not trained to operate in. In these situations, either stop trading or reduce position size drastically. Leverage should be cut to 0. Lesson 3) Try to avoid trades with the risk of losing more than 100%. Putting 10% of capital into a single position is reasonable and not reckless position sizing but even that moderate size with zero leverage can cause serious injuries if the position goes against you by 700% within an hour. Short-selling stocks and trading in securities with built-in leverage such as options and futures carry the risk of losing more than 100%. So, be acutely aware of these risks when you attend courses that teach these strategies to achieve financial freedom as some trainers may downplay the risks to sell the courses. Global financial markets have slipped into bear markets today. It is tempting to try out short-selling in this bearish environment. However, unless you have good reason to believe you have an edge in short-selling, it is best to avoid it.
The article recommends using 10% position sizing because that would cover a 700% spike, but what if the spike had been >1000% Even 10% is too big a position for a volatile short position in Crypto when you come in late to the party. 5% might not be enough either. Think more like 2%. But it does depend on how early or late you go in.
Aside from everything else, this is a reminder of why it's important to take winnings off the table from time to time. Not in a trade management sense, but out of your brokerage account entirely and into tangible assets like property, ideally in the wife's name.
This case study can prove helpful for the newbies who just entered in crypto market with big money but small knowledge .
I did not have the intent to recommend using 10% position sizing when I wrote the article. It was to bring across the message that when one has a position that has the risk of losing more than 100%, even a moderate 10% position size is dangerous because it can cause irreparable damage. 10% position size is fine for long, unleveraged positions where the maximum one can lose is 100% but not ok for positions that carry the risk of losing more than 100%, especially when the losses can happen fast.
I agree. On the part of transferring assets into the wife's name, the investor has to make sure he marries well first. The divorce rate is not low nowadays, so that risk has to be factored in.
Uprise should have employed an experienced trader. never never let a newbie trader handle such a big account!!! The biggest biggest and stupidest mistake this newbie trader made was he failed to realize the downtrend started on 30 Mar 2022. and he only shorted it on 5 May 2022. He has been sleeping for 5 long weeks !!!!! worst, he continued to short more after that. because he only wanted to short it - when Luna's price is very very low - after Luna has broken many many support levels This newbie trader should be mercilessly slaughtered. Timing is extremely important. an experienced trader will not short it if he has missed the earlier trading opportunity.