Wintermute is really crazy:
Some people saw we deposited $700 million into Binance that day and started calling Wintermute a market crash, completely ignoring the fact we withdrew a similar amount that same day. These people were essentially retail investors betting on Altcoin— and we were the ones profiting from them.
So it's kind of an "ecosystem relationship" — they're spouting nonsense on crypto Twitter, and we profit from their stupidity. It's a bit sad, but if they all got smarter, our trading volume might actually go down.
We are almost always net long. We have a clear risk management rule: our long positions will not exceed 25% of our net assets. Even if the market crashes tomorrow, we will only lose 25% at most and will not go bankrupt. We also will not hold more than 35% of our net assets on a single platform.
On October 11th, our positions were on Binance, but we couldn't transfer them out. So, we sold everything we could on DeFi and bought everything we could on Binance, but we couldn't transfer our assets there. We could only wait for our inventory to return. Of course, we could have borrowed assets to make markets, but that was very risky and could result in liquidation. Another option was to quote different prices for USDC on different markets (such as DeFi and Binance) and engage in cross-market arbitrage, but that was also difficult to implement. I'm still quite satisfied with our performance. While we could have made more money, we simply ran out of inventory.
The primary impact over the next few months will be that sectors beyond the majors will be impacted, as this blowout was primarily concentrated in Altcoin. There are far more Altcoin and meme coins in the market today than there were four years ago, and investors have less money and are more cautious, so I suspect Altcoin market enthusiasm will decline significantly. Of course, with new retail investors entering the market every day, the market will eventually recover, but in the short term, I don't expect a major "Altcoin season."
The market is much less interconnected now than it was in 2022, when the Three Arrows collapse dragged down the entire market directly due to its long positions.
If a market maker were to fail, who would be affected? How far would the chain of influence extend? The biggest concern is the "contagion effect." Remember what Alameda did? They frantically dumped DeFi assets during the rebound. Everyone could see it; it was obvious.
If a market maker goes bankrupt, like Wintermute—this is just a hypothetical—what happens? We have some loans, which could potentially go to zero. We also have some market making contracts with the protocol, which might still be there. After bankruptcy, we could theoretically sell some of our assets to recover our funds, or even just run away (just kidding). And then there are our settlement counterparties, who might have margin deposits with us, like BTC or ETH.
Therefore, the true impact primarily includes the protocols that market makers serve and their counterparties who have margin transactions with them. In the worst-case scenario, they might sell their BTC or ETH to cash out, but the scope of this impact is actually very limited.
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