The real nail-biter moment in The Big Short is when Michael Burry begins to worry that he won't get paid... You're likely familiar with Burry. He's a hedge-fund legend. And he earned his fame for calling the 2008 housing crash.
The Crypto Crash That Should Terrify Everyone
By Joe Austin, senior analyst, Chaikin Analytics
The real nail-biter moment in The Big Short is when Michael Burry begins to worry that he won't get paid...
You're likely familiar with Burry. He's a hedge-fund legend. And he earned his fame for calling the 2008 housing crash.
Author Michael Lewis popularized the whole story in his 2010 book, The Big Short. Five years later, it became a hit movie.
Burry's big short on housing was a negative bet on subprime mortgage bonds. And he made the trade via credit default swaps ("CDS"). These work like an insurance policy that pays out if the bonds fail.
Burry knew that subprime mortgage bonds were cratering. And he knew he would be making a fortune for his investors.
But his counterparties in the CDS contracts were big Wall Street banks – like Deutsche Bank (DB), Bank of America (BAC), and Goldman Sachs (GS). And in fall 2008, the whole system was teetering on the edge of collapse.
A counterparty is the person (or the bank) on the other side of a trade. Every buyer needs a seller. And with insurance, someone's on the hook if things go wrong.
In The Big Short, Burry needed the banks to survive long enough to pay him. If Deutsche Bank or Goldman Sachs collapsed, his winning trades would become worthless paper.
It would be like winning a bet with someone who then tells you they're broke.
In 2008, this nightmare scenario became real...
Lehman Brothers collapsed. Folks and institutions that had money at Lehman suddenly couldn't access billions of dollars' worth of their own assets.
Some claims took as long as 14 years to resolve.
After 2008, you would think investors learned their lessons about leverage and counterparty risk.
But on Wall Street, history always repeats itself...
Back in October, a cryptocurrency crash erased more than $19 billion in value in just one day. More than 1.6 million traders were shut out of their positions.
And once again, folks discovered that making the right bet doesn't matter if the system can't stay solvent long enough to pay you.
The crypto world moved on quickly... as it always does. And from the looks of it, the whole episode is being swept under the rug.
Plenty of investors don't get involved with crypto. But all this is a warning whether you own crypto or not. Today, let's look at the surface of what happened. And tomorrow, I'll discuss it in more detail.
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A Historic Collapse in Crypto Markets
Shortly before 11 a.m. on October 10, President Donald Trump announced new tariffs of 100% on Chinese goods.
As you would expect, this spooked the stock market. The S&P 500 Index fell 2.7% for the day. That marked the worst day in the market since "Liberation Day" back in April. And the drop erased roughly $2 trillion in value.
But the big action happened over in the crypto markets. And none of it was good...
Bitcoin dropped more than 14%. Ethereum fell around 12%. And some smaller "altcoins" lost about 40% to 70% of their value.
Those price crashes triggered a historic wipeout in crypto futures.
The collapse wiped out more than $19 billion in leveraged positions. It marked the largest daily futures liquidation event in history.
Crypto exchange Hyperliquid suffered more than $10 billion in liquidations.
Bigger exchanges saw huge wipeouts, too. Bybit saw about $4.6 billion in liquidations. And Binance was hit with liquidations of roughly $2.3 billion.
The full scale of the damage shows up in what's called "open interest." That's the total value of all active futures contracts.
On October 9, open interest stood at nearly $208 billion. By the end of October 10, it had collapsed to around $146 billion.
That's a 30% decline in just one day.
Of course, the real problem here wasn't the tariffs. By early October, leverage had reached historic levels across the crypto ecosystem.
Going into the crash, crypto-collateralized lending stood at nearly $74 billion. That's the highest ever – surpassing even the 2021 peak. And futures open interest had climbed from roughly $133 billion in June to more than $220 billion on October 6.
Behind these numbers was a shift in how people borrow crypto.
Tomorrow, I'll dig into more details behind the crash. Until then, it's a reminder to be extra cautious with any kind of asset when excessive leverage is involved.
A big driver behind the 2008 crash was easy money and excessive leverage pouring into the housing market. And there are eerie parallels between what happened then and crypto borrowing today.
Remember... excessive leverage can turn even promising assets into financial dynamite.
Good investing,
Joe Austin
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.18%
7
19
4
S&P 500
+0.16%
119
252
129
Nasdaq
+0.08%
21
50
29
Small Caps
+0.49%
643
958
288
Bonds
-0.3%
Consumer Staples
+1.17%
3
15
18
— According to the Chaikin Power Bar, Small Cap stocks are more Bullish than Large Cap stocks. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Materials
+4.16%
Consumer Staples
+3.66%
Consumer Discretionary
+3.51%
Industrials
+2.08%
Health Care
+1.51%
Information Technology
+1.5%
Real Estate
+0.47%
Communication
-0.17%
Utilities
-0.28%
Energy
-1.17%
Financial
-1.5%
* * * *
Industry Focus
NYSE Technology Services
11
23
5
Over the past 6 months, the NYSE Technology subsector (XNTK) has outperformed the S&P 500 by +10.37%. Its Power Bar ratio, which measures future potential, is Strong, with more Bullish than Bearish stocks. It is currently ranked #12 of 21 subsectors and has moved down 3 slots over the past week.
Top Stocks
APH
Amphenol Corporation
AMAT
Applied Materials, I
ASML
ASML Holding N.V.
* * * *
Top Movers
Gainers
WDC
+5.83%
STX
+5.75%
DXCM
+5.31%
ALB
+4.98%
DG
+4.29%
Losers
SYF
-8.36%
COF
-6.42%
ON
-5.49%
BBY
-4.87%
QCOM
-4.79%
* * * *
Earnings Report
Earnings Surprises
No significant Earnings Surprises in the Russell 3000.
* * * *
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