How Leverage Turned An AI Boom Into A Crash

In late May, South Korea launched single-stock leveraged ETFs tracking its two biggest chipmakers, SK Hynix and Samsung. These funds used borrowed money to multiply daily returns by two, three, or even five times. Retail investors, hoping to ride the AI boom to riches, poured in. Within weeks, the Cosby index had fallen 22% in a single day, then risen 15% days later. Samsung plummeted 32%, SK Hynix crashed 40%, and $2 trillion in market value was wiped out. The crash was the worst since 2008.

The Leverage Trap

The hosts explain that the crash was not caused by bad earnings alone. SK Hynix did report weaker-than-expected results, but the real killer was leverage. The single-stock leveraged ETFs had become the most popular financial instrument in South Korea. When AI sentiment soured briefly, the amplified losses triggered forced selling. As Scott puts it, "leverage doesn't create risk. It removes your margin for being wrong." The hosts compare this to the collapse of a high-profile hedge fund called Situational Awareness, run by former OpenAI employee Leopold Aschenbrenner. The fund was up 439% for the year by June, but it turned out he was levered 5x. When margin calls hit, he was forced to liquidate his entire public equity portfolio and sell his stake in Anthropic. "It's really easy in good times to mistake leverage for IQ," Scott notes.

The Human Cost