Crypto Markets Are Suffering – But Is It Really “Contagion”?

So we are now about two weeks away from the start of the FTX collapse. The coverage on CoinDesk has been unparalleled.

Here are the biggest FTX-related stories of the past week according to my account:

But beyond the topics directly related to FTX, let’s talk about this contagion – this crypto credit contagion – that everyone seems to be talking about.

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Crypto Credit Contagion Is Contained in Crypto

Financial contagion is used to describe a crisis that spreads from one market or economy to another. An example: house prices started falling in 2006, in September 2007, Lehman Brothers collapsed due to losses associated with subprime loans, then a lot of people lost their jobs (like many).

This contagion was a credit contagion that spread everywhere. The reason this kind of thing happens is due to the intricate web between countless financial institutions that sell and buy countless financial instruments from each other. When one part of the web breaks down, other parts of the web start to break down until you are left with just a jagged mess.

This is happening very clearly in crypto. Since the FTX fallout began, crypto lender BlockFi halted withdrawals from its platform citing exposure to FTX, then another crypto lender Genesis Global Capital also halted withdrawals, then the exchange of crypto Gemini, owned by Winklevoss, closed its Gemini Earn program which offered a return. to customers through, you guessed it, crypto lending through Genesis.

(Genesis Global Trading is part of Genesis Global Trading and owned by Digital Currency Group (DCG). DCG also owns CoinDesk.)

Oh, what tangled webs we weave.

But here is something different between the credit contagion of 2006 and the FTX-induced crypto credit contagion of 2022 (what lenders do, they extend credit). The credit contagion of 2006 led to a global financial crisis that was probably the most severe financial crisis since the Great Depression. Crypto simply isn’t big enough to have a serious impact on the wider economy.

You do not believe me ?

Here are some proof points:

(CoinDesk Research and TradingView)

  • On Thursday, November 10, the US Department of Labor reported that the Consumer Price Index (which helps gauge inflation) had slowed to “just 7.7%”, which was below expectations, so that the S&P 500 (a stock market index) rose from $3,760 to over $4,000 the next day and is now around $3,950. Bitcoin saw a similar price move, rising from $16,000 on Thursday to over $18,000 on Friday. The difference being that the price of bitcoin is now around $16,600 at the time of writing.
  • On the day of FTX’s collapse, most mainstream publications were more focused on something else: the US midterm elections. I know it’s anecdotal, but you’ll just have to trust me on this one.
  • Businesses in general are even more concerned about recessionary pressures from the supply side. The only companies talking about crypto are crypto companies (and maybe The new owner of Twitter).

I’m not saying crypto credit contagion isn’t bad. In fact, it’s bad. Many ordinary people have lost money. Even the Ontario Teachers’ Pension Fund lost $95 million investing in FTX (although that’s only bad as some might claim. I believe this crypto credit contagion will be limited to crypto, this which would disqualify it by definition as a contagion to everything.

This too should pass.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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