Case Studies
18 questions
What warning sign was built into the numbers?
Strong earnings growth alongside weak operating liquidity, with balances held in third-party trust accounts.
Why didn't DAX inclusion help investors?
Index membership says nothing about whether the numbers are correct, it follows from size and tradability.
What protection remains against a case like this?
Diversification. Individual-stock risk isn't compensated and can be fully diversified away.
Why did FTX collapse?
Customer holdings weren't held separately. Simultaneous withdrawals exposed the coverage gap.
What legal standing did customers have?
They held a contractual claim and became ordinary creditors in the bankruptcy proceedings.
What practical consequence follows from that?
Only hold bearable amounts on platforms, and self-custody larger holdings.
What is a death spiral in this context?
Support comes from issuing a second token, whose price falls as a result, requiring even more issuance.
Where did the high yield come from?
Mostly from a reserve set aside for it, meaning a subsidy of demand.
Which stablecoin types have external backing?
Collateralized ones backed by deposited assets, and overcollateralized ones backed by crypto collateral. Algorithmic ones with no backing don't.
What makes a stock vulnerable to a short squeeze?
A high share of shorted stock relative to the freely tradable float.
How does the options market amplify the move?
Sellers of call options have to buy the underlying to hedge, which creates additional demand.
Why is the retail-victory narrative incomplete?
Because late entrants bought near the peak and suffered substantial losses.
How did leverage act as an amplifier?
At high leverage, even a small value decline wipes out equity and forces selling.
Which model assumption broke down?
The low joint default probability of geographically dispersed loans.
Who suffered the permanent damage?
Those who sold at the bottom and holders of individual affected institutions. The broad market recovered.
How was the debt hidden?
Through special-purpose entities that didn't need to be consolidated under the rules of the time.
Why did it hit employees doubly hard?
Because their job and their retirement savings depended on the same company.
What should you watch for in financial statements?
Notes on unconsolidated entities and off-balance-sheet obligations.