Unfortunately, FTX is so entrenched in crypto that the announcement of its insolvency and bankruptcy proceedings are having effects everywhere.
That is, if by “everywhere” you mean “only in crypto.” See, a lot of people are talking about a “contagion,” but is it really a contagion if it doesn’t affect other markets and the broader (real) economy? Maybe, but probably not.
But beyond topics directly related to FTX, let’s discuss this contagion – this crypto credit contagion – everyone seems to be talking about.
Crypto specific contagion
Financial contagion is used to describe a crisis which spreads from one market or economy to another. An example: Home prices started falling in 2006, by September 2007 Lehman Brothers collapsed because of losses associated with subprime loans, and then a lot of people lost their jobs (like a lot).
This contagion was a credit contagion that spread everywhere. The reason these types of things happen is because of the complicated web woven among the countless financial institutions selling and buying countless financial instruments among each other. When one part of the web breaks down, other parts of the web start breaking down until all you’re left with is a shredded mess.
(Genesis Global Trading is part of Genesis Global Trading and is owned by Digital Currency Group (DCG). DCG also owns CoinDesk.)
Oh, what tangled webs we weave.
But here’s something different between the 2006 credit contagion and the 2022 FTX-induced crypto credit (which is what lenders do, they extend credit) contagion. The 2006 credit contagion led to a global financial crisis which was probably the most serious financial crisis since the Great Depression. Crypto is simply not big enough to have a serious impact on the broader economy.
A little proof
Don’t believe me that crypto can’t tank the broader economy?
Here are some proof points:
On the day of the FTX collapse, most mainstream publications were more focused on covering something else: U.S. midterm elections. I know this is anecdotal, but you’ll just have to trust me on this one.
Companies in general are still more concerned about supply-side recessionary pressures. The only companies talking about crypto are crypto companies (and maybe Twitter’s new owner).
On Thursday, Nov. 10, the U.S. Labor Department reported that the consumer price index (which helps measure inflation) slowed to “just 7.7%,” which was below expectations, so the S&P 500 (a stock price index) shot up from $3,760 to over $4,000 by the next day and is now sitting around $3,950. Bitcoin experienced a similar price movement, moving from $16,000 on Thursday to over $18,000 by Friday. The difference being that bitcoin’s price now sits around $16,600 as of writing.
I’m not suggesting that the crypto credit contagion is not bad. In fact, it is bad. A lot of regular people have lost money. Even the Ontario Teachers’ pension fund lost $95 million investing in FTX (although that is only <0.05% of the fund’s total net assets). But in totality it really isn’t as bad as some might make it out to be. I believe this crypto credit contagion will be contained to crypto, which would by definition disqualify it as a contagion at all.
This, too, shall pass.
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The FTX blowup has reinvigorated the discussion of “proof of reserves,” a potential solution that shows with little or no doubt exactly how many tokens are at any exchange that adopts the technique. Several exchanges, including Binance, have announced plans to use the auditing technique to reassure customers. “It would have been a pretty solvable problem if there was more transparency on the balance sheet,” Sergey Nazarov told CoinDesk in an interview.
Long-term BTC holders’ resolve to keep building their coin stashes has weakened amid fears that the implosion of crypto exchange FTX will prolong the crypto winter. “There has certainly been a degree of immediate panic within the HODLer cohort,” analytics firm Glassnode said in a weekly report published Monday, referring to the decline in the supply owned by long-term holders and the movement of inactive coins. The total amount of circulating supply owned by long-term holders has declined by 61,500 BTC or $1.03 billion since Nov. 6.
On Tuesday, the New York Fed announced a program to test the use of digital tokens to settle transactions among financial institutions. Citigroup (C), HSBC (HSBC), BNY Mellon (BK) and Well Fargo (WFC) are among the banks taking part, along with payments giant Mastercard (MA). The 12-week proof-of-concept pilot program will explore the use of a platform known as the regulated liability network (RLN), whereby banks issue tokens that represent customers’ deposits that are settled on a central bank reserve on a shared distributed ledger.
Nathaniel Whittemore covers the latest fallout from the FTX collapse. Genesis Capital has paused withdrawals and loan origination, which has also led to Gemini pausing its Earn program.
