Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
About a year and a half ago, I noted that leverage in crypto and interlinkages via institutional and retail players could cause a minor contagion. I was, of course, soundly mocked for being an idiot. Well then, let me tell you about Celsius, Voyager, Three Arrows Capital and FTX…
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Mini-tagion?
Well, the foreword kind of already said everything (1). But the last few rounds of crypto drawdowns due to some sort of “stablecoin”(2)/leverage issue saw massive dumps in the entire crypto space, accompanied by less severe stocks drawdown.
And that happened, again, today. As FTX circled the drain due to its liquidity (and solvency) issues, stocks took a small beating (SPX down ~2%) on basically no other news (3) — apparently FTX committed the rookie mistake of using their own token as collateral, resulting in a giant #REF! in Excel spreadsheets worldwide.
Thankfully the volume in cryptoverse is relatively small compared to stocks, and the collateral damage was manageable.
SEC/CFTC investigations
While the current issue is said to only affect FTX.com, the SEC and CFTC are actively looking into the issue and potential contagion risks for FTX.us. Unfortunately for banks (4), sometimes even the whiff of impropriety can be extremely damaging (5). We will have to see if FTX.us manages to survive this crisis of faith.
Edit: It appears the DoJ is now also involved in investigations.
Related news
- Crypto.com is halting withdrawal for Solana, USDC and USDT.
- This is directly related to the issues FTX are facing causing a ruckus in those markets.
- Crypto.com is operating normally (as far as I can tell) in other markets, so it should hopefully be fine.
- Perhaps crypto needs a central bank.
- Details of the drama by John Authers of Bloomberg.
Footnotes
- Yes, this is sort of a “I told you so” moment, Mr M.
- Can we still call them “stablecoins”?
- Technically, there was news — midterm election results are mostly out, but given what looks like a gridlocked Congress, that should be positive for stocks.
- Here, I’m using the word “bank” more symbolically — basically any entity that takes money from others for safekeeping, while using part of the money for its own investment purposes.
- This is often cited as the reason why the Fed forced all banks to take bailouts during the 2008 Great Financial Crisis, and forbid any bank from disclosing whether they actually needed the bailout.
Janky Thoughts 
This did not age well:
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