Six months before the collapse of FTX in November set off a crisis in cryptocurrency, there was another cataclysmic event: The stablecoin Terra blew up, wiping out around $1 trillion in value, and triggering a cascade of crypto company failures. The collapse of Terra came as a shock to most—but not to everyone.
A hedge fund called Galois Capital was among the few that smelled something rotten at Terra, and took a short position—betting that the price of Terra’s twin cryptocurrencies would fall. The bet paid off and Galois made a profit, earning plaudits for making a smart decision at a time when the rest of the crypto world thought Terra prices would go to the moon.
Galois’s decision to short Terra was the same type of counterintuitive wager that has been mythologized in past financial debacles. The most famous example was celebrated in the book and movie The Big Short, which told the story of a handful of bold investors who foresaw the collapse of the U.S. mortgage industry in 2008—and made big money betting against it.
Now, in the wake of FTX’s catastrophic $32 billion blow-up, it’s worth asking why no one took out a “big short” against a company that, in retrospect, was flashing warning signs—from shoddy accounting to the lack of a board to relying on a CEO who spent important meetings playing League of Legends.
‘You’re thinking this is going to end poorly’
Chris Drose, the founder of Bleecker Street Research, made his name shorting the stock of a troubled health giant called American Addiction Centers, and has since published exposés on everything from air taxis to an ill-fated sports hustle called Hall of Fame Village that is currently trading in penny-stock territory. Drose says he and other Wall Street short-sellers have been watching the crypto market closely for years.
“[From] the perspective of someone interested in fraud and wanting to be around fraud, you’re outside the world’s best party, and…