Is crypto more like a tulipmania or a Ponzi scheme? Or does it more resemble the collapse of Long- Term Capital Management in 1998 due to a toxic combination of hubris and leverage?
**Crypto’s Domino Effect Is Widening, Threatening More Pain**
**Losses are blowing holes in balance sheets and pushing firms in the industry to near bankruptcy**
**By Caitlin Ostroff and Vicky Ge Huang, The Wall Street Journal, July 2, 2022**
**A handful of crypto players have established financial ties throughout the market and added to risk by borrowing and lending digital assets among themselves, with at least one lender, Celsius Network LLC, drawing on collateral to do its own borrowing....**
**While new to crypto, such problems are well-known in the traditional financial realm. During the 2007-08 global financial crisis, bank-lending practices including rehypothecation of assets — using collateral to borrow more money — left banks short on liquidity. In the aftermath, regulators tightened oversight.** [Tightened oversight on banks, not on crypto. There’s no oversight on crypto. – W]
**The growth of the industry — worth more than $3 trillion at its peak last year — has surpassed the ability of regulators to keep up, according to analysts....** [end quote]
There is something that I don’t understand about the intersection of USDs and crypto.
What does it mean to say “The crypto industry was worth more than $3 trillion at its peak last year”? Does that mean the notional value of the crypto “on paper,” including leverage (borrowing) used to buy the asset? When the value of a crypto declines, who is losing USDs and how much? Are these real losses or paper losses?
To prevent the contagion of a crypto financial panic, the crypto exchange FTX, headed by Sam Bankman-Fried, has set itself up as a “crypto central bank.” FTX struck a deal with the crypto lender BlockFi Inc. including a $400 million credit facility. What does that mean? Is this 400 million USDs? That’s a lot of money to risk out of someone’s pocket. FTX can’t conjure USDs out of thin air like the Federal Reserve.
True believers in crypto are hoping that the 2022 crypto crash will recover like the 2018 crypto crash which apparently “flushed out” weak actors. They also say, “Everything is deeply, deeply intertwined; we didn’t have this in 2018,” indicating that lending between companies can pull them down together.
$3 Trillion is a lot of moolah. Enough to have a Macro impact. (U.S. GDP is $24 trillion.) That’s why I want to know whether this is real USD money that can evaporate out of the Macro economy in a crypto crash. It could significantly impact economic activity.