Affected by the FTX collapse, losing 91.4%, what information did the Multicoin Capital investor letter reveal?

Author: Tracy Wang, Coindesk
Translated by: PANews

The aftershocks of the FTX collapse have not yet dissipated. According to the latest leaked copy of an annual investor letter, the hedge fund Multicoin Capital suffered a loss of 91.4% in 2022, primarily due to two reasons: first, the entire cryptocurrency market was too turbulent last year, and second, it was also affected by the "direct and indirect" impacts of the FTX collapse.

Multicoin Capital admitted in the letter: "Although we successfully avoided the impact of the catastrophic implosion of LUNA and Three Arrows Capital at the beginning of 2022, we could not escape the FTX collapse, nor did we anticipate that FTX's bankruptcy would spread throughout the entire cryptocurrency market. After an extraordinary performance in 2021, 2022 was the worst year for Multicoin Capital since the fund's inception."

Wrong Bet on FTX May Be the Main Cause of Failure

Multicoin Capital is one of the largest and oldest investment management firms in the cryptocurrency industry, often regarded as a very savvy crypto investment management company. Its managing partner, Kyle Samani, launched the hedge fund strategy in October 2017, aiming to invest in liquid tokens. Multicoin Capital also manages three venture capital funds and invested in the now-bankrupt exchange FTX.

In fact, Multicoin Capital not only entrusted some of its assets to FTX but also made some wrong bets, such as being long on the native token SOL of Solana and assets based on Solana, in addition to holding equity in FTX.US and a large number of unfinished derivative contracts. In another investor letter last November, Multicoin Capital detailed its financial situation, revealing that about 10% of its assets were held by FTX and that it held a large amount of FTT, SOL, and SRM, all of which have since plummeted in price.

Management Decision Errors Led to Expanded Losses

In fact, after the news of FTX's bankruptcy broke, Multicoin Capital's flagship fund lost more than half of its funds in just two weeks, with a drop of 55%, not including liquidity and other self-funded investments.

However, compared to other investment firms that quickly severed ties with FTX and wrote down assets, Multicoin Capital seemed to have strategic decision-making issues. They claimed at the time that they did not have plans to promptly close their flagship product or switch to proprietary trading, only stating that they would improve operations and infrastructure to reduce counterparty risk.

Clearly, this judgment was problematic. As everyone knows, with FTX unable to recover and entering bankruptcy proceedings, the likelihood of Multicoin Capital recovering its assets continued to diminish, ultimately leading to the reluctant decision to write down the related assets to zero. Although they have not specified the write-off amount, market experts believe the related write-down figure could exceed $850 million.

Will Multicoin Capital Be the Next Victim of the FTX Collapse?

Interestingly, the situation at Multicoin Capital may not be as dire as many imagine. According to data disclosed in the fund's investor letter, despite a significant shrinkage in fund size, the Multicoin Capital hedge fund saw a 1,376% increase after fees from its inception to 2022. Entering 2023, the cryptocurrency market experienced a brief rebound from a low point, which pushed the fund up by 100.9% in January this year, bringing its growth from inception to January 2023 to 2,866%.

Moreover, the losses Multicoin Capital incurred last year were primarily due to its assets trapped on FTX and tokens directly affected by FTX, such as the native token FTT. According to Multicoin Capital in the investor letter, the fund created a "side pocket" in November for assets affected by the FTX collapse, separating these assets from the main fund, including assets left on the FTX exchange (currently in bankruptcy proceedings) and assets withdrawn from FTX (which may be reclaimed due to legal proceedings in the future).

Furthermore, Multicoin Capital stated that it has taken new measures to "mitigate counterparty risk," such as------

• Only keeping assets on exchanges that support 48-hour trading at a time (not putting all assets in exchange custody).
• Adjusting collateral management practices to reduce the amount of collateral held by exchanges for derivative positions.
• Collaborating with more cryptocurrency asset custodians to further diversify custody risks.

Multicoin Capital expressed that it remains "firm" in its long-term strategy but will not blindly follow market trends. Clearly, after experiencing the FTX collapse, Multicoin Capital should have learned some lessons.