From the collapse of Three Arrows Capital's Su Zhu in 2022 due to high leverage operations, resulting in insolvency, to the cumulative loss of over $747 million by Yi Li Hua's institution engaging in leveraged long positions by 2026, the two massive loss events separated by several years reflect the core pain points of trading in the crypto industry: the extreme temptation of high leverage, compounded by extreme market volatility, makes it difficult for even industry-leading players to escape the curse of 'one misstep leads to total loss.' Behind this is a common issue in the crypto trading field: lack of risk control and cognitive misjudgment.
The collapse of Three Arrows Capital is a classic tragedy of aggressive trading by early institutional investors in the crypto industry. Su Zhu and his team leveraged their positions through cyclical collateralized lending, continuously increasing their holdings of ETH, betting on GBTC and LUNA/UST, even misjudging the imminent arrival of a Bitcoin "supercycle," constantly increasing their leveraged positions and pushing the institution's risk tolerance to its limit. At that time, Three Arrows Capital, with its "unlimited ammunition" approach, became one of the largest Ethereum holders, but ignored the core risk of leveraged trading—any adverse market fluctuations would be amplified exponentially. Ultimately, the black swan event of the Terra/UST collapse, coupled with the overall downturn in the crypto market, completely broke Three Arrows Capital's leverage chain. Not only did it collapse due to insolvency, but it also triggered a liquidity crisis in the crypto lending sector, affecting platforms such as Voyager Digital and BlockFi. At its core, the blind optimism about market trends, the abuse of leverage tools, and the lack of effective risk hedging mechanisms turned this once top-tier hedge fund, managing over $18 billion in assets, into a "Madoff-style" leverage tragedy.
Four years later, Yi Lihua repeated the mistake of high leverage. He leveraged his position to go long on ETH at a high average price of $3180, borrowing over $887 million from Aave to amplify his purchasing power. As the price of ETH continued to decline, he fell into the trap of "buying on dips"—constantly adding margin and transferring funds to buy ETH to reduce liquidation risk, thus concentrating the risk on a single asset. When the price of ETH fell to the $2600 range, the previous unrealized losses continued to widen. Even after reducing his position through stop-loss orders and repaying loans to lower leverage, he still incurred a total loss of over $700 million. His liquidation price even dropped to around $1640, constantly teetering on the brink of forced liquidation. Yi Lihua's actions exposed that even seasoned local crypto investors could not escape the mindset of "making quick money with leverage in a bull market." By building positions at high prices and using high leverage to amplify the risk of price fluctuations, the heavy allocation to a single asset rendered the entire trading system completely incapable of withstanding price drops.
Although the two incidents occurred several years apart and had different backgrounds, they shared highly similar core causes, which are common problems in the cryptocurrency trading industry. Firstly, the abuse of high leverage has become a widespread ailment. Cryptocurrency exchanges often offer leverage of tens or even hundreds of times, amplifying both the potential gains and risks of trading. Industry practitioners often only see the profit potential of leverage, ignoring the 24/7 volatility of the cryptocurrency market—even a 1% adverse fluctuation can instantly wipe out a highly leveraged position. Whether it's Three Arrows Capital's revolving lending or Yi Lihua's large-scale leveraged long positions, both essentially treat leverage as a "weapon" for profit, rather than a "tool" for controlling risk.
Secondly, the lack of a risk control system and misjudgment. In traditional financial markets, institutional trading has strict leverage limits, position management, and hedging mechanisms. However, the development speed of the crypto industry far exceeds the speed of regulatory and industry rule improvement. Most institutions lack awareness of diversification and have not used derivatives such as options and futures to build downside protection. Sanjian Capital's bet on a single track and Yi Lihua's heavy investment in ETH both violated the basic principle of "don't put all your eggs in one basket." Furthermore, their misjudgment of market trends—the former firmly believed in Bitcoin's "supercycle," and the latter firmly believed in ETH's upward trend at high levels—made their aggressive operations lose fundamental support, ultimately leaving them defenseless when the market reversed.
Third, a pro-cyclical trading mindset exacerbates risks. The shifts between bull and bear markets in the crypto market are often extremely rapid, and practitioners are easily swayed by the profit-making effect of a bull market, leading to aggressive pro-cyclical operations: leveraging heavily, taking large positions, and chasing highs during bull markets, while lacking timely stop-loss strategies when bear markets arrive. The continuous averaging down by Three Arrows Capital during the bull market and Yi Lihua's high-level position building of ETH are both manifestations of pro-cyclical thinking. When the market turns from bull to bear, this mindset leads to a vicious cycle of "averaging down - losing money - averaging down again," ultimately causing losses to continuously expand.
The two cases of massive losses, from Three Arrows Capital to Yilihua, are not isolated incidents, but rather lessons that the crypto trading industry must confront in its development. The innovative nature of the crypto industry grants it far greater potential than traditional finance, but the fundamental logic of finance remains unchanged—risk and return go hand in hand, leverage is a double-edged sword, and risk control is always the core of trading. For those working in the crypto industry, whether institutions or individuals, only by abandoning the "gambler's mentality," rationally viewing leverage tools, and establishing strict position management, stop-loss mechanisms, and diversified investment strategies can they survive market fluctuations. For the industry as a whole, improving regulatory rules and establishing industry risk control standards, ensuring that leveraged trading has boundaries and constraints, is crucial for the industry to move from "wild growth" to "regulated development."
The future of the crypto industry has never been a stage for high-leverage gambling, but rather a combination of technological innovation and compliant trading. The lessons learned from Three Arrows Capital and Yilihua should serve as a wake-up call for all crypto practitioners: in this highly volatile market, survival is more important than making quick money. $BNB
