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Where’s the Contagion from the Crypto Implosion?

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As the collapse of FTX shows, Pranks ensure smooth and efficient contagion within the crypto zone.But beyond that?

To wolf richterThis is the transcript of my podcast on Sunday, October 30th. wolf street report.

Exactly one year ago, in November 2021, when the crypto frenzy reached its peak, the combined market capitalization of Bitcoin and thousands of other crypto tokens reached $3 trillion worldwide. Today, the market cap is about $850 billion, so it’s down 72%. So in 12 months he’s gone $2.1 trillion.

Cryptocurrencies of all kinds collapsed, and so-called stablecoins, which were supposed to be pegged 1:1 to the US dollar, collapsed overnight.

The cryptocurrency collapse has caused the collapse and bankruptcy of many cryptocurrency exchanges, cryptocurrency lenders, cryptocurrency hedge funds, cryptocurrency miners, etc.

The underlying principle of the crypto zone is that every company is deeply interconnected with other companies, each lending to other companies, lending to associated hedge funds, and betting with huge leverage on cryptocurrencies. It seems to be to do token. This results in very smooth and efficient contagion, which I like.

They went to Heaven together until November 2021.

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

FTX, Alameda Research and affiliates have imploded spectacularly in the past week and are now filing for bankruptcy. This is a huge mess that drags on for a long time and creates even more of the vile reveals we’ve already seen. .

These despicable revelations and allegations appearing by the hour are accompanied by sheer numbers. $1 billion here, $10 billion there. They have been incinerated or incinerated, for example, his $10 billion in client funds loaned by FTX to affiliate Alameda Research. Anything is fine. There have been reports of funds disappearing even after filing for bankruptcy, probably due to hacking.

The amount of lost cryptocurrencies appears to be in the billions of dollars. Every day there are new twists and turns, revelations of a downright dastardly business with billion-dollar tentacles stretching in all directions.

FTX was preceded by Voyager Digital and Celsius, which filed for bankruptcy in July. Voyager-linked hedge fund Three Arrows Capital also filed for bankruptcy. It was the collapse of Three Arrows Capital that triggered the Voyager collapse.

As the bankruptcy proceedings of FTX.com, FTX US, Alameda Research, and affiliates progressed, it became more and more complicated, and more and more about lending client cryptocurrencies to hedge funds, about counterparties and defunct cryptocurrencies. will become clear. About other exchanges, etc., about relying on homegrown collateral such as native tokens, and about it imploding, and about the endless tentacles of interconnectivity in the crypto zone. And then suddenly there will be other crypto lenders who will stop withdrawals and hire bankruptcy lawyers.

In the wake of FTX’s bankruptcy, another crypto lender, BlockFi, has suspended withdrawals, preventing customers from taking out cryptocurrencies and fiat currencies. Then I hired a bankruptcy lawyer. BlockFi reportedly lent some money to Alameda Research, but Alameda Research collapsed and these cryptos were removed along with it.

Interestingly, in June BlockFi, already in trouble, received a $200 million bailout from FTX, all in cryptocurrencies.

As such, transmission within the Crypto Zone is smooth and efficient. There’s not much to go out of your way to slow it down.

These crypto companies, and all sorts of other crypto companies, were funded as startups by some of the biggest names in the venture capital industry. And they threw hundreds of millions of dollars at each. I just wanted to ride the cryptocurrency gravy train without oversight or control, carelessly. Customers’ money can be gone, and billions of dollars of other people’s money is gone.

FTX has dozens of venture capital investors who have invested $2 billion in FTX over the past two years, with its last funding round earlier this year at a $32 billion valuation.

These investors include well-known names such as Sequoia Capital, SoftBank, Lightspeed and BlackRock. Their investment in his FTX vanished. And thus the cryptocurrency collapse contagion spread to his VC fund.

The contagion has also spread to companies straddling crypto zones. For example, banks that have some exposure to cryptocurrency companies.

Silvergate Bank specializes in trading with cryptocurrency companies and has exposure to FTX. The bank is owned by Silvergate Capital, which also has exposure to cryptocurrencies, whose shares have fallen 85% since the peak of the cryptocurrency boom a year ago.

Shares of Signature Bank, which tied its fortune to cryptocurrencies, are down 61% from its highs.

SVB Financial Group, which owns Silicon Valley Bank, is heavily influenced by the entire startup scene, including cryptocurrency startups. The stock has fallen 69% from its highs.

If regular commercial banks have some exposure to these failing companies, it will be a small amount for them. Banks are in the business of taking this type of credit risk. And they can take those losses.

Robinhood is exposed to all sorts of things, but FDX founder and former CEO Sam Bankman-Fried, who owns a large stake in Robinhood, has specifically said he will not be exposed “directly” to FDX. said to

The contagion has spread to other publicly traded companies directly or indirectly exposed to cryptocurrencies, all of which have seen their stock prices plummet. MicroStrategy, a survivor of the dotcom bust and an enterprise software company, decided to sell bonds and buy Bitcoin with the proceeds, making it a leveraged he Bitcoin fund.

Many US cryptocurrency miners have turned into penny stocks and are down 97% or something. One unlisted US Bitcoin miner has already filed for bankruptcy. Some warn that you may have to file for bankruptcy. The problem for them is that after the price of Bitcoin crashes, it becomes uneconomical to mine Bitcoin due to high electricity costs.

As FTX is torn apart and dismantled, many people and entities will lose a lot or all of their money.

The Luna cryptocurrency crash evaporated $60 billion overnight, but it was global. As with all of these things, it’s not just US money that’s disappearing, it’s the world’s money. And outside the Crypto Zone, Luna’s implosion was largely unaffected.

All this is trivial compared to big stocks like Meta plummeting 70% or Tesla plummeting 50%. $620 billion lost in Tesla’s decline. Amazon’s decline wiped out some $800 billion. But like crypto, this is all global money. People all over the world invest in US stocks.

So why have cryptocurrencies and cryptocurrency companies gone bankrupt and the contagion spreading to neighboring regions, but not to wider markets and economies before?

At one point, the market capitalization of cryptocurrencies was $3 trillion, now it’s down to $850 billion, more than two-thirds has already disappeared, and outside the crypto zone, the Beyond all the turmoil and turmoil, a cryptocurrency implosion is happening. Orderly. No big deal really. but why?

Money, or what people thought was money, came out of nowhere in the last few years and has gone nowhere in the last 12 months.

It was easy money, and much of it had not yet been converted into fiat currency or deposited into bank accounts. And for many, it was more profit than their own capital that evaporated.

And part of it had to do with where this money was lost. These losses have hit cryptocurrency investors not only in the United States, but around the world.

And a big part has to do with numbers. they are not big enough. The US stock market is about $40 trillion. Cryptocurrencies didn’t get ten times less. Two-thirds of losses are already a thing of the past. And the rest of the cryptocurrencies represent only 2% of the stock market. People outside the crypto zone won’t even notice if that rest vanishes just as it hits zero – $850 billion left on a global scale is too small.

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