Crypto Markets Are Suffering – But Is It Really ‘Contagion’?

So we’re now roughly two weeks removed from the start of the FTX meltdown. The coverage on CoinDesk has been without peer.

Here are the biggest FTX-related stories from last week by my count:

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

Crypto credit contagion is contained to crypto

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

This contagion was a credit contagion that spread everywhere. The reason these types of things happen is because of the complicated web woven among the countless financial institutions selling and buying countless financial instruments among each other. When one part of the web breaks down, other parts of the web start breaking down until all you’re left with is a shredded mess.

This is very clearly happening within crypto. Since the FTX fallout began we’ve had crypto lender BlockFi halt withdrawals from its platform citing exposure to FTX, then another crypto lender Genesis Global Capital also halted withdrawals, and then Winklevoss-owned crypto exchange Gemini shut down its Gemini Earn program which offered yield to customers through, you guessed it, crypto lending through Genesis.

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

Oh, what tangled webs we weave.

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

Don’t believe me?

Here are some proof points:

I’m not suggesting that the crypto credit contagion is not bad. In fact, it is bad. A lot of regular people have lost money. Even the Ontario Teachers’ pension fund lost $95 million investing in FTX (although that is only <0.05% of the fund's total net assets). But in totality it really isn’t as bad as some might make it out to be. I believe this crypto credit contagion will be contained to crypto, which would by definition disqualify it as a contagion at all.

This, too, shall pass.