Did Margin Trading and Bad Analytics Bankrupt this 20 Million Dollar Fund?

Last week, we at Quantify Crypto brought you an article about the pros and cons of margin trading.  Most people realize the massive risks that come along with trading on margin, yet people still choose to do it all the time.  Here’s a real world example of the destruction that can come with margin trading.

Adaptive Capital was a cryptocurrency hedge fund managed by Murad Mahmudov, a former employee of Goldman Sachs.  The fund described themselves as a “multi-strategy cryptocurrency hedge fund with a deep focus on on-chain analytics.”  In an interview, Mahmudov said Adaptive Capital had raised 20 million dollars from investors.

Mahmudov was very bullish on Bitcoin and was a strong believer in “on-chain analytics”.   He had over 71,000 followers on Twitter, based on his expertise analysis of Bitcoin and other cryptocurrencies.  In interviews he had stated Bitcoin would achieve a price of

“10 Million dollars”, in addition to many extremely bullish thoughts on Bitcoin's future.

On January 13th, Mahmudov tweeted this chart and wrote “bears are deluded at best, dishonest at worse”

The chart shows the analytics Mahmudov was using to make his point, specifically weekly and daily moving averages (MA) and exponential moving averages (EMA) ranging from 50 days to 100 weeks.  At this time Bitcoin was having a very strong January and would continue to have strength, as it started the month at $7,115 and ended the month at a price of $9,412.

His analysis on Bitcoin price movement was based on applying successful stock metrics to cryptocurrency.  At Quantify Crypto, we believe it is exceptionally dangerous to apply weekly and daily moving averages designed for stock price movements to cryptocurrency.  Our own research shows that shorter term metrics are critically important for Bitcoin and other cryptocurrencies.  Bitcoin price movement regularly has price changes of 10% in a day, including a 35% price spike on October 25th, 2019.  

On February 28th, Mahmudov had a positive Bitcoin tweet that included “Could BTC be coiling in preparation for something huge?”  However, Adaptive Capital was wiped out on March 13th when the price of Bitcoin lost over 50% of its value at the market low.  According to reports, the fund had far too much exposure to margin trades and the price drop ruined them.

Adaptive Capital blamed “infrastructural insufficiencies” for their failure to react to the Bitcoin dump, likely referring to the fact that BitMEX reported a 45 minute outage in their services while the price drop was occurring.

Adaptive Capital wrote they “took a big hit” and announced its closure in a letter to investors: "Adaptive has made the decision to close operations and return the remaining funds to investors," adding "we are convinced that the risks of continuing operations in such an unstable environment outweigh the potential benefits."

Mahmudov still hasn’t sent out a tweet about cryptocurrency trading since March 7th.

While we agree it is bad when exchanges go down, in our opinion this was not the primary reason Adaptive Capital lost most of its funds.  We feel using poor analytics with a margin position for the wrong price direction led to the disastrous results.

If you apply the metrics Mahmudov used in his January chart to the way the market looked in late February to early March, you get something that looks like this.

In the chart with his daily metrics “The weekly metrics” is similar, the lines have converged together.  On January 28th the Bitcoin price moved above its 200 day moving average, which Mahmudov would have viewed as bullish. On March 2nd the Bitcoin price fell to $8,537 followed by a rebound above all the moving averages to $9,200 a few days later, he probably would have viewed this as bullish trading above trend lines.  He may also have considered that trend lines indicating Bitcoin price support levels.  The March 8th price action from $8,908 to $8,031 was the beginning of a severe loss that would continue March 12th when the price traded below $4,000.   Everything in this paragraph is speculation on what Mahmudov may have been thinking based on the analytics he used in the January 13th tweet.

Margin trading certainly has a huge appeal, who wouldn’t love to have up to 100 times more buying power than they actually have in cash?  Even with the possibility of making greater returns, you need to evaluate the risks and consider what happened to Adaptive Capital and many other investors.  The ground could fall out from underneath you at any moment. 

Since the morning of March 12th, before Bitcoin had its big dip, its price was at $8,000.   Just following a buy and hold strategy for Bitcoin until today would have resulted in a percentage return of 21%.  If you are bullish on an asset, sometimes the best strategy is to just wait, instead of trying to force a fast get rich quick return with margin trading.  Mahmudov and the co-founders of Adaptive Capital have been successful before and will most likely be successful again in the future.

The platform Quantify Crypto provides live cryptocurrency prices, technical analysis, news, heatmaps and more. Our flagship product is the trend algorithm, designed to be on the correct side of significant cryptocurrency price moves. We are a new site, please check us out and let us know what you like and do not like about the site. None of this is meant to be financial advice and I do not have any financial expertise. Although I worked at the New York Stock Exchange for over 23 years, it was as a developer supporting computer systems, not as a stock trader. Full discloser: I do own Bitcoin and have stock positions.