Where’s the Contagion from the Crypto Implosion?

Yves here. Wolf Richter is correct to say that the crypto is unlikely to kick off a broader financial meltdown, since among other reasons, that would have happened already. Total crypto market cap is down by more than 2/3 from its market peak of $3 trillion.

Admittedly, it is possible that a further leg down might blow up a whale that also has extremely levered positions with institutions in TBTF land (thing Archegos). But again, Archegos put Credit Suisse in a lot of pain, but didn’t set off a broader unwind.

Readers might say, “But subprime was only $1.4 trillion and it blew up the global economy!” That is the conventional narrative. It is not correct. The 2007-2008 crisis was a derivatives crisis. Credit default swaps on subprime were 4 to 6 time the real economy value of subprime mortgage securitizations (about 70% of the total). Moreover, significant “insurers” of these wagers were highly leveraged, systemically important financial institutions. By contrast, Sam Bankman-Fried hoist on his own petard is very entertaining and won’t keep the Fed up at night.

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

This is the transcript of my podcast on Sunday, Oct 30, THE WOLF STREET REPORT.

Exactly a year ago, in November 2021, during peak crypto craziness, the market cap of all of the many thousands of crypto tokens combined, from bitcoin on down, hit $3 trillion globally. Today, the market cap is at about $850 billion, so that’s down by 72%. In other words, $2.1 trillion have vanished in 12 months.

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

The collapse of the cryptos has triggered the collapse and bankruptcy of a number of crypto exchanges, crypto lenders, crypto hedge funds, crypto miners, etc.

It seems the fundamental principal in the crypto zone is that every firm must be deeply interconnected with other firms, each lending to the other, and lending to affiliated hedge funds that then make huge leveraged bets on cryptos, and they’re bidding up each other’s tokens. This, as I like to call it, makes for very smooth and efficient contagion.

They all went to heaven together until November 2021. And now they’re all going to heck together.

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

FTX, Alameda Research, and affiliated companies imploded spectacularly over the past week and have now filed for bankruptcy, and it’s a huge mess that will drag out for a long time and produce a lot more of the kinds of sordid revelations we’ve already seen.

These sordid revelations and allegations emerging on an hourly basis come with huge numbers attached to them, a billion bucks here, $10 billion there, like $10 billion in customer funds being lent by FTX to its affiliated trading outfit Alameda Research where they were then incinerated or whatever. Reports emerged of funds disappearing even after the bankruptcy filing – perhaps due to a hack.

The amounts in cryptos that vanished appear to be in the billions of fiat dollars. Every day, there are new twists and turns and revelations of an utterly sordid business with multi-billion-dollar tentacles reaching in all directions.

Before FTX there were Voyager Digital and Celsius that both filed for bankruptcy in July. Three Arrows Capital, a hedge fund cross connected with Voyager, also filed for bankruptcy. It was the collapse of Three Arrows Capital that triggered the collapse of Voyager.

As the bankruptcy proceedings of FTX.com, FTX US, Alameda Research, and affiliated companies move forward, it will get even messier and more complex, there will be lots more revelations about counterparties and vanished cryptos, about lending customers’ cryptos to hedge funds and other exchanges and whatever, and about relying on homemade collateral, such as native tokens, that then imploded, and about the endless tentacles of cross-connections in the crypto zone. And there will be other crypto lenders that suddenly halt withdrawals and hire bankruptcy counsel.

In the wake of FTX’s bankruptcy, another crypto lender, BlockFi, halted withdrawals, preventing customers from taking their cryptos and fiat out. And it hired bankruptcy counsel. BlockFi reportedly loaned Alameda Research some funds, but Alameda Research collapsed, taking these cryptos down with it.

The funny thing is that in June, BlockFi was already in trouble and then got a $200 million bailout from FTX, all in cryptos.

So the contagion within the crypto zone is smooth and efficient. Not much gets in the way of slowing it down.

These crypto companies, and all kinds of other crypto companies, were funded as startups by some of the biggest names in the venture capital industry. Just about the entire VC industry jumped on this crypto stuff. And they just threw hundreds of millions of dollars at each of them, willy-nilly, without oversight, without controls, just wanting to ride up the crypto-gravy train, and they just handed piles of money to some dazzling crypto characters and let them run with it, and they ran with it, and now the money is gone, and customer money may be gone, and billions of dollars of other people’s money are gone.

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

These investors include well-known names, such as Sequoia Capital, SoftBank, Lightspeed, BlackRock, and a bunch of others. Their investments in FTX have vanished. And this is how the contagion from the crypto collapse spread to VC funds.

Contagion has also spread to companies that are straddling the crypto zone, for example to banks that have some exposure to crypto firms.

Silvergate Bank has specialized in dealing with crypto firms, and it has exposure to FTX. The bank is owned by Silvergate Capital, which also has some crypto exposure, and the shares of Silvergate Capital have collapsed by 85% from the peak crypto craziness a year ago.

Signature Bank, which tied its fortunes to cryptos, well, its shares are down 61% from the high.

SVB Financial Group, which owns Silicon Valley Bank, is heavily exposed to the entire startup scene, including crypto startup companies. Its shares have plunged by 69% from the high.

If regular commercial banks have some exposure to these collapsed companies, it’s going to be minor amounts for the bank. Banks are in the business of taking this kind of credit risk. And they can take those losses.

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

Contagion has been spreading to other publicly traded companies with direct or indirect exposure to cryptos, whose shares have all plunged, such as crypto exchange Coinbase, whose shares collapsed by 86% from the high; MicroStrategy which is a dotcom-bust 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 have plunged 86% from their high.

Many of the crypto miners in the US have turned into penny stocks, down 97% or whatever. One bitcoin miner in the US, which wasn’t publicly traded, already filed for bankruptcy. Others have warned that they might have to file for bankruptcy. The problem for them is that the high cost of electricity makes it uneconomical to mine bitcoin, after the price of bitcoin collapsed.

As FTX gets dismembered and dissected, lots of people and entities will lose lots or all of their money, and when everything is said and done, it will be counted in the billions, or tens of billions of dollars.

The Luna crypto crash vaporized $60 billion, like overnight, but that was global, like all these things, it’s not just US money that vanishes, it’s global money. And outside of the crypto zone, the Luna implosion barely made a dent.

All this is minor stuff compared to a big stock such as Meta plunging 70% or Tesla plunging 50%. Tesla’s drop alone wiped out $620 billion. Amazon’s drop wiped out something like $800 billion. But like cryptos, this is all global money. People around the world invest in US stocks.

So, with cryptos and crypto-companies imploding, and the contagion spreading into neighboring areas, why hasn’t there been more contagion into the broader markets and the economy?

At one point, cryptos had a market cap of $3 trillion, now it’s down to $850 billion, over two-thirds has already vanished, and outside of the crypto zone – beyond all the mess and chaos in the crypto zone – the crypto implosion has been orderly. Really no big deal. But why?

It was money – or what people thought was money – that came out of nowhere over the prior years, and over the past 12 months, it went back to nowhere.

It was easy-come-easy-go money, much of it hadn’t been converted into fiat yet, hadn’t made its way to bank accounts yet. And for a lot of people, it was the gains that evaporated, more than their own capital.

And part of it had to do with where this money was lost. Lots of people lost lots of money, but that was spread around the globe. Those losses hit crypto investors around the world, not just in the US.

And a big part has to do with the numbers. They’re just not big enough. The US stock markets are around $40 trillion. The cryptos never amounted to one-tenth of that. Two-thirds of the losses are now already behind us. And the remainder of crypto, what’s left of it, just amounts to 2% of the stock market. If that remnant too goes away, like goes to zero, people outside the crypto zone won’t even notice – that remaining $850 billion on a global scale is just too small.

You can subscribe to THE WOLF STREET REPORT on YouTube or download it wherever you get your podcasts.

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  1. Realist

    These ruinous losses could have happened to a more richly deserving bunch of folks.

    Now it appears so many of them are not going to make it, I hope they have fun staying poor!

  2. Wukchumni

    What I don’t get is how Bitcoin can still be $16,508 while we’re in the midst of a mirage money meltdown?

    1. Bugs

      an asset that is based purely on the amounts people are willing to invest into it but with no current productive use is worth exactly what people expect it will be worth? So its price is basically the Coyote when he runs off the end of the cliff, holding the “HELP!” sign

      1. Suchitis

        Well.. the utility of gold is small versus its puchasing power. Good money is about the characteristics “built into” the “money”. And that we collectively accept. would claim BTC is vastly better than Fiat, yet it is debatable versus gold.

        Gold got 5k years of price history though, btc is barely a teenager. So there is that…

        Then there is the “if people had control” of their purchasing power, somebody would loose control… cant have that happen…

    2. David Anthony

      A lot of crypto guys are saying Bitcoin is safe and the best coin to put your money in. They are blaming “alt coins.”

      1. amechania

        The truanon podcast says bitcoin is a mirage built on laundering ‘altcoins’. Especially tether. They say.

        If you can pump and dump virtual scrip or specie, why not do that and feed it all into the largest bubble you can find to cash out? and then repeat. I dont know the ratio of real estate to the crypto market, but if it isnt unsustainable now, then just wait.

        If we take pro-crypto thought as true, how many people can buy any given alleged inflation hedge before its Credit Default Swaps all over again?

    1. Aaron

      Same. I got my laughs with the first few articles about how inept and manipulative SBF and company are. Now I just feel bad for crypto consumers. And, well, consumers in general. It’s not just crypto that’s hurting.

  3. Wukchumni

    Singaporean investment fund just wrote off $275 million in FTX, said it had been misplaced. That’s after doing 8 months of due diligence before pulling the trigger in 2021.

    Sure, cryptocurrency is chicken neck little compared to the rest of the bird that Wall*Street carves up, but isn’t it more important that this is really the first bubble to break bad, setting a precedence for all the other bubbles that largely make up our economy.

    p.s. Yves, it’s $3 Trillion, not billion.

    1. Sunny

      Billions, trillions, what comes next. Its the way all fiat currencies go. Slow at first then suddenly. I think it will be within my lifetime that a spectacular dollar event will happen.
      Crypto has a eerily semblance to the notgeld money german localities used to issue after first war.

    2. tegnost

      wrote off $275 million in FTX, said it had been misplaced.

      …it’s in the drawer, room 17 at the williams ca motel 6, next to gideons bible…

  4. Tom Stone

    This is NOT an implosion, Crypto is simply reverting to its fundamental value…
    “Brother, can you paradigm” .

      1. mary jensen

        Anagram of ‘karma’: a mark. And that’s all you need to know.

        “What does it mean when someone is a “Mark” The slang term “Mark” is a noun which is used to represent and describe someone who is a target of some kind of organized crime. A mark is a target.”

    1. tegnost

      This is NOT an implosion, Crypto is simply reverting to its fundamental value…
      “Brother, can you /s paradigm” .

      I see you forget the snark tag today…/snicker…

  5. Bobby Gladd

    There are no “coins.“ There are no “mines.“ There are no “wallets.“ There are no “blocks.“ There are no “chains”

    It’s a gossamer Metaverse of babblelicious metaphors.

    At the end of the day, there are no “assets,” only a huge pile of unenforceable signatures.

    BTW: check out the “CoffeeZilla“ dude on YouTube. Kid is all over it.

    1. Michael Fiorillo

      He’s fun, but I prefer “Crypto Critics Corner:” less concern with production values, greater detail and informative guests. Also last month, I think it was, This Is Revolution Podcast (which is usually excellent and should be followed by NCers) had an excellent episode about crypto as Glibertarian Hellscape and desperate attempt by individuals to escape the bleak future neoliberalism has planned for us.

      Last week CCC interviewed Mike Burgersburg of Dirty Bubble Media, who was the first, or among the first, to publicly question FTX’s solvency. His research was supposedly later used by Zhao of Binance to precipitate the run on their assets.

    1. Arizona Slim

      OTOH, we could have a contest to complete the last sentence. Here’s my entry:

      And they just threw hundreds of millions of dollars into a raging inferno.

      Next contestant, please…

      1. Vodkatom


        The brochure said ”into a no-risk money making scheme for those doing gods work, shepherding our sacred capital, backed by the full faith and credit of the central bank

        Sometimes I wonder why they go through the pretense of getting free money to create “companies”, pay themselves upfront, and then bankrupt the companies.

        It seems more efficient for the central back to just to give the insiders piles of money any time the unwashed masses start to accumulate enough money to upset the political balance.

    2. Yves Smith Post author

      You are correct. Apologies. Wolf did something with his site layout and unlike any other site, have to go to a different browser to hoist his copy. Somehow that caused a problem even though this post had no special formatting.

  6. Wukchumni

    How come there hasn’t been a cavalcade of sob stories from young adults who lost it all on the numismatrix?

      1. Wukchumni

        For something that we’ve been informed it caused a million people to lose everything on, there are essentially no comments on that FTX Reddit page you linked-just handfuls, how is that possible?

          1. Arizona Slim

            Kind of like those comment threads that keep cropping up on YouTube? You know the ones, they start with vague financial advice like diversifying one’s sources of income, and, next thing you know, the sock puppets join in?

            1. ambrit

              I particularly like the “comments” that go something like: “I’m so happy that my initial investment of Ten Grand brought me a return of $23,500 in the last six weeks!” Then the ‘comment’ goes on to hype an “Investment Guru Managed Fund.” Further down the thread is usually something like: “So you made out like a bandit using Madame Legrand’s Astrology Guided Fund method too! Great!!!” It then devolves into a run of “Testimonials” interspersed with ‘subtle’ steers towards some particular website.
              As some genius of the Days of Yore put it; “There’s a [insert group signifier here] born every minute.”

        1. curlydan

          Maybe a lot of the 1M+ people are foreigners?

          Crypto might be a fairly small subset of Americans. The IRS recently released some crypto stats about Tax Year 2020 when they asked every individual filer, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

          2.3M said yes, 157.0M said no (or 1.4% in the affirmative)

          (pg 14 of the report aka pg 15 of the pdf)

    1. Dikaios Logos

      I’ve heard no sob stories, but there has been an explosion in attempts to liquidate certain luxury goods. Watches were one of these markets that took a turn.

      Recently, eBay has featured as many (or more) Lamborghini Urus listings than it has for Honda Civics. The absurdity of that points to problems for some and crypto is a likely culprit. G Wagons are similarly flooding the market, I hear.

      1. ambrit

        Will we now be seeing an inversion of the “Natural Order of Things” and experience the spectacle of watching as the high end real estate suffers the highest percentage losses in “value?”
        Roughly speaking, just how much of the high end purchases this time are based on Cryptos?
        At the least, when the Stock Market collapses, there are usually some “real assets” left to carry on. With Cryptos, it’s all imaginary. This is the ultimate expression of the infantilization of the Western elites. Everything is now a game.
        “Doctor Berne, please pick up the invisible courtesy phone.”

  7. Robert Hahl

    Is it too late for AIG to start selling crypto default insurance? Probably not. These failures go to show that the product is needed.

  8. Vodkatom

    FWIW the transcript here stops at the 4:30 mark in the podcast. Wolf Richter makes a few points after that about why no contagion. Two stood out to me. The VC funds investing in crypto used cheap/free money so easy come / easy go. The losses were spread out world wide, so not concentrated in any on place.

    So perhaps crypto is just a footnote of an era of zero rates and free money?

  9. voislav

    Also, much of the crypto losses were paper losses, amount of real money traded on these exchanges was a small fraction of the reported trading volume. Even the surviving exchanges, like Binance, report their reserves are almost exclusively in crypto and not in cash or other assets.

    So this is a mostly self-contained system where crypto is traded for crypto and not much real money changing hands, so its impact on the wider economy is minimal, both in boom and bust times.

    1. Michael Fiorillo

      Stablecoins like Tether, the collapse if which will likely bring about theThe End, are probably a better gauge of actual dollar investments into the domain… nowhere near trillions, but not chump change, either.

  10. Cassandra

    I’m wondering if the oncoming electricity price apocalypse will render the blockchain, let alone mining, untenable.

  11. Revenant

    Notgeld was a valuable expression of MMT principles. It was an anonymous bearer security that was exchangeable for real goods and services and backed by the tax-raising powers of the (local) sovereign. The opposite of crypto tokens!

    The only similarity was that it was not Geld!

  12. polar donkey

    I work for a business now that used to take bitcoin payments. We stopped in the summer. Younger guys (20’s to early 30’s) and ask if we still take bitcoin. I tell them no and a lot say “I understand”. Costly lesson for those guys.

  13. will rodgers horse

    I will say, the “Crypto is dead” line sure seems to be getting an awful lot of airtime…

  14. Conrad Schumacher

    Somewhat perversely, I think an argument could be made that the limited systemic effects of the crypto collapses show the benefits of the lack of regulation in that space. Yes a whole bunch of naive customers will lose whatever they put in but at least the public at large aren’t on the hook for anything.

    No government regulation seems to equal no public obligation.

  15. OptikErik

    I have been considering buying one dollar’s worth of BitCoin at a local ATM style machine that is devoted to BitCoin.
    Just for fun. Just to have a piece of paper to pin up on the wall. Can anybody forsee this giving me trouble somewhere down the line?

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