XRP, DOGE, ADA, ETH, BTC take heed of Big Short legend’s warning: “Mother of all crashes”

Michael J. Burry, the founder of Scion Capital who became a legend for being portrayed by Christian Bale in the Big Short movie, has warned the “mother of all crashes” is coming due to FOMO (fear of missing out) in cryptocurrencies and meme stocks.

The hedge fund manager who famously shorted the 2007 mortgage bond market by swapping Collateralized Debt Obligations (CDOs) – in other words, who was amongst the first investors to foresee and profit from the subprime mortgage crisis – has recently pointed to leverage in crypto as a key driver for the moves.

“The problem with #crypto, as in most things, is the leverage. If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know.”

Last week, FinanceFeeds published a feature article with a focus on leverage as a driver of the crypto crash in May. While trading firms regulated in the most authoritative jurisdictions offer responsible leverage caps, other companies are pushing it to the limits.

“All hype/speculation is doing is drawing in retail before the mother of all crashes. #FOMO Parabolas don’t resolve sideways; When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. History ain’t changed”, Mr. Burry said in a deleted tweet, which was recovered by the Michael Burry Deleted account (“@michaeljburry deleted me, but it’s the internet”).

The cryptocurrency market has been bleeding in the last few days again, after having “crashed” in May in what was called a healthy correction from its all-time highs.

At the time, Bitcoin (BTC) fell from 65,000 to 30,000, while Ethereum (ETH) plunged from 4380 to 1732, Binance Coin (BNB) dropped from 692 to 212, Cardano (ADA) went from 1.77 to 1.26, Dogecoin (DOGE) tumbled from 0.74 to 0.22, Polkadot (DOT) bled from 49.75 to 13.81, and Polygon (MATIC) went on a free fall from 3 to 0.75.

Natalia Zakharova, Head of Sales at FXOpen, said the crypto crash came as an unpleasant surprise to asset holders despite the long-anticipated extreme volatility. The b-book model comes to mind when discussing high leverage.

“I have some serious doubts about how venues offering 1:100 leverage on cryptos cover their positions. I see more harm in retail investors flocking to buy cryptos expecting that their bullish run will last forever and ignoring all the risks involved.”

“The phenomenal growth seen in crypto between late 2020 and April 2021 was largely down to major players like Elon Musk backing the market, but retail traders were keen to ride the wave higher too”, said David Madden, market analyst for Equiti Capital.

“Margin trading helped retail traders gain exposure to crypto but as we saw in May, digital currencies suffered a painful fall. Last month’s crypto crash highlighted the risks associated with using leverage to trade the assets. Retail traders should understand that leverage can accelerate a rally but also a fall.”

“While this allows for greater gains in speculative trading, it also accelerates losses exponentially”, said Natallia Hunik, Chief Revenue Officer at Advanced Markets.

“The type of volatility that we see in crypto assets is non-customary where traditional financial instruments are concerned so, given the combination of lower liquidity than traditional assets and higher volatility, overleveraged crypto trading has a greater chance to create a cycle, or trend, and to ultimately drive the price of the crypto asset down.”

Today, Bitcoin is down by more than 17 percent near the $33,000 mark and the crypto market cap has dropped below the $1.5 trillion threshold.