Thread by @thiccythot_

the financial engineering of crypto derivative explosions

a story about the trading dynamics behind the explosive leveraged degeneracy this past week

for noobs and veterans alike

1/

1) What
started it all

On May 29, $150M of leverage built up on TOMO, a 100MM market cap coin at the time

TOMO then exploded and squeezed shorts over 120% in 5 minutes from $1.2 to over $2.5

2/

Let’s review some basics

How do we measure leverage?

leverage is a financial derivative called a ‘perpetual’ or ‘perp’

open interest (OI) is the # of perp contracts betting on the price

it measures the amount of leverage in the system

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thiccy.substack.com/p/perpetuals-1…

BTC has a market cap of $500B but only has around $6B leverage (OI), around 1%

TOMO had a market cap of 130M with over 150M of leverage built up, over 120%

Think about how volatile BTC is already because of leverage

Now imagine that x 100

4/

As mentioned in the article the spot price dictates the trading

And for TOMO, which I’m not even sure quite what it does, the spot books were illiquid

So what happens when illiquid spot books dictate $150M of perp leverage?

It incentivizes manipulation

5/

And this is what happened in TOMO and why they call them cartel coins

Someone ripped into the books on the 29th and exploded $40M of over-leveraged shorts in 5 minutes

call an ambulance dawg

6/

And now that the market has witnessed one explosion, it’s been quick to try to run it back on other symbols

$180M of lev has built up in LINA (130M mcap)

$35M of lev in KEY (50M mcap)

To me this is reminiscent of the GME short squeezes in equities in Jan ‘21

7/

What’s the science?

spot supply is scarce, so spot trades have giant impact

it’s easier to move spot up (by buying) then moving it down (finding a borrow and selling)

This means logistically it is easier to liquidate the shorts than the longs

8/

Because it is hard to find spot to borrow, the funding rate to be insanely negative

People who want to short can only do it with the perp, causing dislocations between the perp price and the spot price

They have to pay funding to the longs in order to maintain their shorts

9/

These funding payments act as attrition against the shorts, slowly bleeding their PnL over time

For example, LINA shorters have cumulatively paid 10% already to longs over the period of 6 days

Why do they pay? Because it's clear these tokens will go back to 0 eventually

10/

it's not all rosy for longs, there are significant risks for them

If the team or any insiders obviously has a large spot bag and would be happy to dump their bags into a pump

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Furthermore, if someone secures a borrow, they can close out the basis for fat funding payments

this lowers the costs for other participants to come in and short the perp and squeeze out the longs

it's beneficial for longs that the token is hard to borrow

12/

Which is why the coins that do this are typically weird ghost token projects that nobody cares about

the main spot holders are probably not keeping that close of an eye

and it makes it hard to find a good source of borrow to liberate the shorts

13/

So with these high leverage coins, it’s a race against time

Can longs bleed out the shorts before insiders dump or market makers find borrow?

Or can they squeeze them out with a big spot buy?

14/

Or will the shorts be liberated by a source of borrow and send the moonboy longs back into the shadow realm?

15/

Whatever happens to these coins, it is inarguably fun to watch the fireworks

Please do not try and play these pvp games unless you are a high enough combat level

This is not financial advice, please use your own discretion

I love how many of y’all reported this tweet

The cartel is trying to suppress their secrets