Multicoin Capital, a digital asset investment company, suffered a loss of up to 91.4% in 2022 as a result of investors fleeing the market after FTX’s disastrous collapse.
A copy of the company’s annual investor letter claims that despite surviving the demise of Terra’s algorithmic stablecoin and the loss of another cryptocurrency hedge fund Three Arrows Capital, the hedge fund was severely damaged after the collapse of FTX (3AC). The message stated:
The disastrous implosions of LUNA and Three Arrows Capital earlier in the year were successfully avoided by the fund, but we were not able to avoid the explosive information about FTX or the accompanying contagion that spread throughout the market. Our performance in 2022 was the poorest since the company’s founding, following an exceptional year in 2021.
One of the biggest and most established investment management companies in the cryptocurrency industry, Multicoin Capital is well known for being a very smart investment management organisation.
A “thesis-driven investment firm that invests in cryptocurrencies, tokens, and blockchain firms transforming trillion-dollar markets,” is how the fund promotes itself.
Kyle Samani, the managing partner, developed Multicoin Capital’s hedge fund strategy, which invests in liquid tokens, in October 2017. Also, the company manages three venture capital funds and owned stock in the now-defunct exchange FTX.
Despite the significant downturn, Multicoin’s cryptocurrency hedge fund has nevertheless generated over 1,300% net returns since its creation through 2022.
Multicoin revealed that the fund earned 100.9% in January 2023, boosting the fund’s return from its creation to January to 2,866%, as the overall cryptocurrency market recovered earlier this year.
The majority of Multicoin’s losses from the previous year stem from its indirect ownership of the company through holdings of digital assets like FTT, the exchange’s native token, and assets that are still on the platform. The company said it swiftly established a side pocket (a carveout of the main fund) for assets affected by FTX in November 2022.
Included in this were assets that were frozen on the exchange and are currently frozen in bankruptcy proceedings. The letter also mentions Multicoin holdings that were taken out of FTX soon before company collapsed and could be susceptible to clawbacks by FTX.
In the letter, Multicoin stated that it had implemented further measures to “mitigate counterparty risks.” The company intends to only store enough trade assets on an exchange for 48 hours at a time.
Also, the fund is adding new custodians to diversify custodial risk and will modify collateral management procedures to lower the amount of collateral held on exchanges for derivatives contracts.
Early in November, FTX and its collection of cryptocurrency businesses filed for Chapter 11 bankruptcy. Sam Bankman-Fried, the disgraced founder of FTX, was later detained in The Bahamas after formal criminal charges were officially brought against him by US prosecutors. In the end, he was returned to the US and released from prison after posting a $250 million bond in a New York court.