George Soros’s Playbook on Shorting

Published in

DeFi Passively

6 min readJun 7, 2022

That night, Soros borrowed ~$7b of GBP and began selling it for German Mark.

George Soros made $1b by depegging a currency & shorting it. His playbook was used in the UST attack. In this article you’ll learn:

• What the play is

• How to spot it

• How to avoid it

History doesn’t repeat, but it rhymes:

We’ll cover:

• The problems with artificially pegging currencies,

• How George Soros managed to depeg the British Pound and make > $1b in profit,

• How Soros’s play influenced the attack on the @terra_money ecosystem last week.

Content converted from the thread by Economiser on Twitter.

The exchange rate

Following WWII, European countries were eager to prevent another world war from emerging. They believed closer economic and political integration was vital. Exchange rate harmonization was therefore introduced to promote stronger economic ties.

In 1979, European countries agreed to bring their currencies in line with each other. This was called the Exchange Rate Mechanism (ERM). Given its strength, the German Mark (DM) became the de-facto ‘anchor’ currency of the ERM.

Currencies effectively became pegged to the DM. However, the ‘peg’ allowed currencies to fluctuate by 6% around the Mark.

In October 1990, Margaret Thatcher signed the UK up to the ERM.

At the time, the British Pound (GBP) was valued at DM 2.95.

If the GBP dropped to DM 2.78, the Government was required to step in and buy up GBP.

This would ↑ the GBP’s price and bring it back to peg.

UK Recession

However, in 1990 the UK was entering a recession.

Normally, the Bank of England would reduce interest rates to encourage consumption. But lower interest rates means less yield on GBP for currency traders.

This results in ↓ demand for GBP and therefore ↓ value of the GBP.

The Bank of England DIDN’T lower interest rates. And they committed to purchasing GBP to keep it within 6% of the DE. Given the recession, many investors thought this strategy wasn’t sustainable and that the GBP would ultimately lose its peg.

The big question was when?

The shorting

In 1992, George Soros was convinced Britain’s economy was weakening.

So he began to short the GBP.

This involved:

• Borrowing GBP from banks, and

• Immediately selling GBP for DM.

He amassed an initial short position of over $1 billion against the GBP.

However, Soros needed a catalyst for the collapse.

On 15 Sept 1992, in an interview with the @WSJ, the head of the German Central Bank, suggested that currency devaluation could help address the economic instability in Europe and the UK.

Soros saw this as a ‘clarion call’.

That night, Soros borrowed ~$7b of GBP and began selling it for DM.

When the UK market had opened, it had been flooded with GBP sales, driving the price down to 2.80 GBP to the DM.

The GBP was dangerously close to losing its peg. The Bank of England had two options:

• buy more GBP using its foreign exchange reserves, or

• ↑ interest rates to attract investors (but risk slowing the economy).

They bought more GBP, but the foreign exchange reserves were becoming drained & GBP’s price wasn’t recovering. On 16 Sep, the Bank of England resorted to hiking interest rates from 10% to 12%, and then again to 15%.

However, the GBP continued to fall. Investors were convinced the GBP would keep dropping, and so they began offloading GBP on the market.

GBP tanked by > 9% & lost its peg.

The GBP had dropped from 2.80 DM to 2.55 DM. So at 7.40pm, on 16 Sep, the UK Government suspended its membership of the ERM and stopped pegging the GBP to the DM.

As the GBP dropped further, no longer having to maintain peg, Soros pocketed over $1b through his short positions.

That day, Weds 16 September 1992, came to be known as “Black Wednesday”.

And it also served to inspire an attack on the Terra Luna ecosystem last week.

The $UST fiasco

Recapping the $UST fiasco:

• Attackers short $BTC

• They borrow ~100k $BTC & purchase $UST

• They sell $350m UST on Curve (when liquidity was low due to LFG moving UST to a new liquidity pool)

• $UST depegs slightly

• They sell $650m UST on Binance

→ Massive depeg

• Like the BoE, @LFG_org buys UST (by selling BTC), and attempts to restore peg.

• People become nervous and start selling UST, further losing peg.

• As LFG burns UST to reduce supply, more LUNA is minted ↓ its price.

• Traders short LUNA and UST, further dropping its price.

• $BTC price drops by over 25%

• Estimates are that the attacker made ~$800m on the play

See these excellent threads from @OnChainWizard and @Route2FI for the details:

Commonalities

The BoE and LUNA both experienced:

• a few large investors seeing the peg was based on shaky fundamentals,

• the investors amassing significant liquidity quickly,

• timing the dump on the market,

• triggering a loss of confidence and therefore further dumping

Going forward, as an investor, you should be paying more attention to:

• liquidity concentration,

• how pegs are maintained,

• how stablecoins are collateralised, and

• how stablecoins respond to changes in investor sentiment

And there you have it.

Soros’s moves in 1992 to depeg the GBP from the German Mark and profit through short positions was an inspiration behind the attack we saw with $LUNA / $UST this week.

As a result, investors are becoming more cautious about algorithmic stablecoins.