Despite the focus on LTCM being 'too big' or 'too leveraged' in 1998, the capital deployed in similar relative-value strategies today is 10 to 100 times larger, suggesting the industry has amplified, not learned from, the systemic risks of scale and leverage.

According to Andrew Ross Sorkin, while bad actors and speculation are always present, the single element that transforms a market downturn into a systemic financial crisis is excessive leverage. Without it, the system can absorb shocks; with it, a domino effect is inevitable, making guardrails against leverage paramount.

Bitcoin's recent crash is attributed to extreme leverage unique to crypto, with platforms letting users buy $100 of Bitcoin with only $1 of their own money. This amplifies gains, creating bubbles, but more dangerously, it amplifies losses, forcing panic selling and cascading liquidations that can erase huge gains almost instantly.

Widespread credit is the common accelerant in major financial crashes, from 1929's margin loans to 2008's subprime mortgages. This same leverage that fuels rapid growth is also the "match that lights the fire" for catastrophic downturns, with today's AI ecosystem showing similar signs.

Current market bullishness is at levels seen only a few times in the past decade. Two of those instances led to corrections within three months. This euphoria, combined with low volatility and high leverage, makes the market vulnerable to even minor negative news.

A proprietary model tracking investor positioning shows a historic degree of credit bullishness, second-highest on a median basis. Such extremes typically precede adverse outcomes in financial markets, increasing the probability of a violent correction or choppy trading over the next one to three months.

Since 2022, highly leveraged hedge funds have bought 37% of net long-term Treasury issuance. This concentration makes the world’s most important market exceptionally vulnerable, as any volatility spike could trigger forced mass selling (degrossing) from these funds.

Selling in a downturn is driven by two distinct forces: voluntary panic from seeing portfolios in the red and consuming negative media, or forced sales (margin calls, foreclosures) when investors have used too much debt and can't cover their positions.

The narrative of the 1929 crash as mass psychological panic is misleading. The primary driver was a mechanical liquidity crisis where heavily leveraged investors were forced by margin calls to sell, creating a downward spiral regardless of their long-term belief in the market.