Where is the infection from the crypto explosion?

ive here. Wolf Richter is correct in saying that cryptocurrency is unlikely to start a broader financial meltdown, because among other reasons, it could have already happened. The total cryptocurrency market cap has fallen by more than 2/3 from the market peak of $3 trillion.

Admittedly, another leg could blow off a whale that also has very high positions with institutions in TBTF land (the Archegos thing). But again, Archegos has caused Credit Suisse a lot of pain, but not a broader relaxation.

Readers might say, “But the mortgage was only $1.4 trillion and destroyed the world economy!” This is the traditional narrative. It’s not correct. The 2007-2008 crisis was a derivatives crisis. The CDS on the sub-prime mortgage was 4 to 6 times the real economic value of the mortgage bond (about 70% of the total). Moreover, the important “insurers” for these bets were highly influential financial institutions of systemic importance. By contrast, Sam Bankman-Fried’s lever on his petard is highly entertaining and won’t make him weary at night.

By Wolf Richter, editor at Wolf Street. Originally published in Wolf Street

This is the transcript of my podcast for Sunday, October 30, The Wolf Street Report.

Exactly a year ago, in November 2021, during the height of the crypto craze, the market capitalization of all the thousands of cryptocurrencies combined, from bitcoin down, was $3 trillion globally. Today, the market capitalization is about $850 billion, which is a 72% growth. In other words, $2.1 trillion disappeared in 12 months.

All kinds of cryptocurrencies have imploded, some so-called stablecoins that are supposed to be pegged 1 to 1 to the US dollar crashing overnight.

The collapse of cryptocurrency led to the collapse and bankruptcy of a number of cryptocurrency exchanges, cryptocurrency lenders, crypto hedge funds, cryptocurrency miners, etc.

It seems the basic principle in crypto territory is that each company should be highly interconnected with the others, each company lending to the other, lending to affiliate hedge funds who then make huge bets on cryptocurrency, and they outbid each other. symbols. This, as I like to call it, makes the infection very smooth and effective.

They all went to heaven together until November 2021. And now they will all move in together.

But where is the infection to the broader market, other asset classes, banks, and other players in the economy?

FTX, Alameda Research, and its affiliates have exploded spectacularly over the past week and have now filed for bankruptcy, which is a huge mess that will go on for a long time and produce a lot of the kinds of sordid discoveries we’ve already seen.

These sordid revelations and claims that come out on an hourly basis come with huge numbers attached to them, $1 billion here, $10 billion there, like the $10 billion in client money being loaned by FTX to its trading firm Alameda Research where it got burned after that or whatever. Reports surfaced of funds disappearing even after filing for bankruptcy – possibly due to the hack.

It appears that the amounts in the cryptocurrency that disappeared were in the billions of fiat dollars. Every day, there are new twists and turns and revelations of an utterly unsavory business with multi-billion dollar tentacles reaching in all directions.

Prior to FTX, Voyager Digital and Celsius both filed for bankruptcy in July. Three Arrows Capital, a Voyager-linked hedge fund, also filed for bankruptcy. It was the collapse of Three Arrows Capital that caused the collapse of Voyager.

As the bankruptcy proceedings of FTX.com, FTX US, Alameda Research and its affiliates progress, it will become more and more complex, and there will be a lot of revelations about disappearing counterparties and cryptocurrencies, about lending cryptocurrencies to clients to hedge funds and other exchanges and whatever, and about Reliance on home-made collateral, such as the original tokens, which then exploded, and around the endless tentacles of cross-communications in the crypto-area. And there will be other cryptocurrency lenders who will abruptly halt withdrawals and hire a bankruptcy counselor.

In the wake of FTX’s bankruptcy, another crypto lender, BlockFi, has halted withdrawals, preventing customers from taking out and issuing their cryptocurrencies. And I hired a bankruptcy lawyer. BlockFi reportedly lent Alameda Research some of the money, but Alameda Research collapsed, taking these cryptocurrencies with it.

The funny thing is that in June, BlockFi was already on the hook and then got a $200 million bailout from FTX, all in crypto.

So the infection within the encryption zone is smooth and efficient. There isn’t much in the way of slowing it down.

These crypto companies and all kinds of other crypto companies have been funded as startups by some of the biggest names in the venture capital industry. Almost the entire venture capital industry has jumped on these crypto things. They threw hundreds of millions of dollars at each and every one of them, willing or unsupervised, no oversight, no controls, they just want to ride the crypto gravy train, they just hand over piles of money to some dazzling crypto personalities and let them run with it, run with it, and now the money is gone Customers’ money may be lost, and billions of dollars of other people’s money are gone.

FTX has had dozens of venture capital investors invest $2 billion in FTX over the past two years, with the latest round of funding earlier this year worth $32 billion.

These investors include well-known names, such as Sequoia Capital, SoftBank, Lightspeed, BlackRock, and a host of others. Their investment in FTX has vanished. And this is how the infection spread from the cryptocurrency crash to venture capital funds.

The infection has also spread to companies that span the crypto region, for example to banks that have some exposure to crypto companies.

Silvergate Bank specializes in dealing with cryptocurrency companies, and has exposure to FTX. The bank is owned by Silvergate Capital, which also has some exposure to cryptocurrency, and Silvergate Capital shares have crashed 85% from the height of the crypto frenzy a year ago.

Signature Bank, which has pegged its fortunes to cryptocurrency, well, its shares are down 61% from the rally.

SVB Financial Group, which owns Silicon Valley Bank, is highly exposed to the entire startup scene, including crypto startups. Its shares have fallen 69% from their highs.

If normal commercial banks had some exposure to these failing companies, it would be minor sums for the bank. Banks take on this type of credit risk. And they can bear those losses.

Robinhood is exposed to all kinds of things, but specifically said it has no “direct” exposure to FTX, even though FTX founder and former CEO Sam Bankman-Fried owns a significant stake in Robinhood.

The infection has spread to other publicly traded companies with direct or indirect exposure to cryptocurrencies, whose shares have all declined, such as cryptocurrency exchange Coinbase, whose shares have collapsed 86% from their highs; MicroStrategy, a dot-com crisis survivor and enterprise software company that decided to sell bonds and buy bitcoin with the proceeds, turning itself into a leveraged bitcoin fund, well, its shares are down 86% from their highs.

Many US crypto miners switched to penny stocks, down 97% or something. A bitcoin miner in the US, which has not traded publicly, has filed for bankruptcy. Others have warned that they may have to file for bankruptcy. The problem for them is that the high cost of electricity makes bitcoin mining uneconomic after the bitcoin price crash.

When FTX is dismantled and dissected, many people and entities will lose a lot or all of their money, and when all is said and done, it will be counted in the billions, or tens of billions of dollars.

The Luna crypto crash evaporated $60 billion, like overnight, but that was global, like all of these things, it’s not just American money that’s disappearing, it’s global money. And outside of the cryptocurrency area, the Luna implosion has barely caused an aberration.

All of this is minor stuff compared to a large stock like Meta plunging 70% or Tesla plunging 50%. The Tesla decline alone has wiped out $620 billion. Amazon’s decline wiped out nearly $800 billion. But like cryptocurrencies, it’s all global money. People all over the world invest in US stocks.

So, with cryptocurrency and cryptocurrency companies collapsing, and contagion spreading into neighboring regions, why hasn’t there been more contagion in the markets and broader economy?

At one time, the market capitalization of cryptocurrencies was $3 trillion, now it’s down to $850 billion, more than two-thirds of it has already disappeared, and outside the cryptozone – far from all the chaos and chaos in the cryptozone – an implosion of cryptocurrencies was organized. Really not a big deal. but why?

It was money – or what people thought was money – that had come out of nowhere over the previous years and, over the past twelve months, had come back into nowhere.

It was easy-access money, a lot of which hadn’t been converted into fiat yet, and it hadn’t made its way into bank accounts yet. And for many people, the gains have evaporated, more than their capital has evaporated.

And part of it has to do with where he lost that money. Many people lost a lot of money, but it spread all over the world. These losses hit cryptocurrency investors all over the world, not just in the United States.

And a large part is about numbers. It is not big enough. US stock markets are about $40 trillion. Cryptocurrencies have never been to a tenth of that. Two-thirds of the losses are already behind us. And the rest of the cryptocurrency, what’s left of it, is only 2% of the stock market. If that rest were to vanish as well, like go to zero, people outside the crypto realm wouldn’t even notice – that $850 billion left on a global scale is very small.

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