What Do LTCM, Dotcom Stocks, And Cryptos Have in Common? A Lot.

This article is an interesting take on the similarities of the meltdown of hedge fund Long-Term Capital Management (LTCM) in 1998, the meltdown of dotcom stocks in 2000, and the ongoing meltdown in crypto-currencies and the crypto infrastructure.

For those too young to remember the LTCM disaster (or perhaps you’re not too young but just don’t want to think about it; I don’t blame you), here’s the story.

It started in August 1998 when Russia defaulted on its debt and devalued its currency. LTCM did not have a big exposure to Russia, but that didn’t matter. A global panic started that blew out all spreads in stocks, bonds, futures, and commodities. Investors lost money in every trade because everyone wanted his money back all at once. It was a global liquidity crisis.

LTCM was finally rescued by 14 big banks under the watchful eye of the Federal Reserve (I negotiated that rescue, so I had a front-row seat). We were just hours away from shutting every market in the world, but a new $4 billion capital injection stabilized the balance sheet, and markets gradually normalized.

The dotcom disaster is probably still fresh in your mind. The NASDAQ fell 80% over the course of 2000-2001. That’s comparable to how far the Dow fell at the start of the Great Depression.

Remember Pets.com (with the sock puppet mascot) and JDSU? They were the wave of the future and ended up in the dumpster fire.

The crypto crash is new this year and is still going on. Bitcoin has fallen from $68,990 last November to $19,825 last week. That’s a 71% crash in eight months.

Other cryptos have fallen by comparable amounts. Some stablecoins such as terraUSD had their blockchains frozen. The popular crypto LUNA went from $1.00 each to zero. Investors lost over $40 billion in terraUSD and LUNA combined. Losses have also fallen on the crypto infrastructure including exchanges, crypto-funds, and other platforms.

On the surface, it would not seem that a hedge fund, sock puppets, and cryptos have much in common. The article explains why they do.

What they had in common was a belief in technology that was “new” and would revolutionize the world. LTCM was a “money machine.” Dotcom stocks would eliminate bricks-and-mortar stores. Cryptos would replace the dollar as the global reserve currency.

All of these claims attracted overeager investors who were blind to the risks. They also attracted leverage, which amplified the risks. In the end, there’s nothing new under the sun. The lesson for investors is to be wary of the next new, new thing.

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