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FTX “contagion” spreads, highlighting the crypto industry's interdependence

Monday, November 21, 2022 by Robinhood Snacks |
Coin-tagion (Chesnot/Getty Images)

Coin-tagion (Chesnot/Getty Images)

One-two contagion punch… As the crypto industry reels from FTX's collapse, the billion-dollar question is, who might be next? We may know soon, as BlockFi's reportedly planning to file for bankruptcy. The crypto lender, which held nearly $4B in customer assets, paused withdrawals this month, citing "significant exposure to FTX." It also had loans out to Alameda Research, FTX's so-called sister firm. It's not the first time contagion’s come for BlockFi:

  • Terra-part: The TerraUSD stablecoin melted down in May, wiping out $40B in investor value. The resulting chaos felled crypto hedge fund Three Arrows Capital (3AC), which in turn threatened BlockFi, which had made loans to 3AC.
  • FTXtra Life: BlockFi was saved partly by a $400M credit line from FTX. Now FTX might be its undoing.

FTX's bankruptcy is a powerful blow… because crypto is a highly leveraged industry (think: using borrowed assets to make trades). That causes ripple effects when big players fall. Liquid, an exchange that FTX acquired this year, froze withdrawals last week. Crypto lender Genesis suspended new loans and redemptions. Gemini, the Winklevoss-helmed exchange that used Genesis to offer a yield product, also paused some redemptions. Retail exchange Genesis Block said on Friday that it would cease trading. And there's fear contagion could spread even further:

  • Crypto.com (picture: Matt Damon Super Bowl ads, Lakers’ stadium-naming rights) tried to reassure investors it would not follow FTX.
  • Nine exchanges now say they'll offer up "proof of reserves" to show they still have customers' assets.
THE TAKEAWAY

Contagion thrives because crypto's interwoven… with leverage as the thread. If a crypto lender or exchange lends its customers' assets to a hedge fund (like: 3AC or Alameda), which then uses those assets to generate yield (aka: earn crypto interest) and make potentially risky bets… one wobbly domino risks toppling the whole lot. FTX’s bankruptcy isn’t the end of this story: Binance CEO Changpeng “CZ” Zhao says he’s "very worried" about some forms of crypto leverage — and regulators are on high alert.