I’m sort of getting sick of the phrase “contagion”.
Nonetheless, it seems the C-word is coming for the digital asset house once more. By now we’re acquainted with the collapse of FTX, one of many world’s largest cryptocurrency exchanges.
But it’s far from over.
LUNA set the precedent
While the crash right here doesn’t evaluate to the notorious demise spiral of UST and LUNA (to refresh my PTSD), that scandal does present how far-reaching the tentacles of such a sudden lack of capital may cause.
UST was value $18.6 billion and LUNA $29.7 billion on the eve of the Terra meltdown in May. Within a few days, these figures have been zero. FTX, then again, is reportedly taking a look at a steadiness sheet gap of $8 billion.
So, the numbers aren’t as comparable, however the domino impact could possibly be. Numerous companies acquired caught up within the Terra crash by holding UST on their steadiness sheets, as properly as being over-exposed to different crypto belongings, all of which fell within the aftermath of the scandal.
We noticed Celsius file for chapter, owing $4.7 billion to over 100,000 collectors. Voyager Digital, one other crypto lending agency, additionally had over 100,000 collectors on the hook – though for a decrease sum of $1.3 billion.
Then there was Three Arrows Capital, owing $3.5 billion to 27 totally different corporations. I might go on, however you get the purpose. The crypto business was far to incestuous, with corporations holding items of different corporations, regardless of all being uncovered to the identical systemic threat.
In retrospect, all of it reads like a cautionary story for threat administration and diversification. How crypto corporations thought it was smart to commerce their very own Treasuries, belongings and no matter different liquidity that they had, on the exact same extremely risky asset class to which their enterprise was already uncovered, is past me.
But they did, and the domino impact adopted.
Who is uncovered to FTX?
The query now turns into this: who is uncovered to FTX?
One hopes that the business realized a lesson from Terra and therefore is extra prudent this time round. Then once more, the flipside is that FTX appeared like they have been as protected as could possibly be: funds have been saved there in stablecoins and fiat – not simply extremely risky cryptocurrencies.
Much like those that fell sufferer to UST thought that it was a steady asset pegged to $1, there are those that acquired blindsided by FTX, merely leaving their funds within the change denominated in fiat foreign money.
We know now that Sam Bankman-Fried had different concepts, sending these funds to his sister buying and selling agency Alameda Research, following a collection of unhealthy investments and loans getting referred to as in. Ironically, these loans have been probably referred to as within the aftermath of the LUNA crash, when spooked traders moved to get their funds of crypto by all means potential.
Companies are already starting to wobble. BlockFi, one more crypto lender, paused withdrawals and issued an announcement outlining that the injury was stark.
“We do have significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US,” BlockFi stated.
They had signed a take care of FTX in July for a $400 million revolving credit score facility. It is arduous to see them recovering after pausing withdrawals – which we all know by now is the demise sentence.
The cash truly goes past aggressive crypto companies. Sequoia Capital, SoftBank, and Tiger Global, who’re as large and boring as conventional traders get, have all been burned.
“Based on our current understanding, we are marking down our investment to $0”, Sequoia stated in a observe to LPs. I believe we are able to all agree that’s a good name.
SoftBank is reported to have misplaced $100 million, whereas Tiger Global is apparently down $38 million.
I used to be let go by Sequoia Capital immediately. Buck needed to cease someplace. I used to be the 27 12 months previous affiliate chargeable for copying and pasting income and revenue numbers from a spreadsheet within the FTX information room right into a PowerPoint slide in an funding memo as diligence
— Kyle Russell (@kylebrussell) November 10, 2022
A fast look a the under graphic ought to inform you all you could know:
Going ahead
As I stated, I don’t count on this to be as grave a liquidity crisis as LUNA. But it might be delusional to not count on additional ache – and that features some sombre bulletins which is able to come out of the blue. There might be corporations caught up on this mess that may take folks abruptly.
$10 billion is a hell of some huge cash. It can’t disappear with out reverberations elsewhere. Hopefully, the injury is as minimal as could possibly be hoped for, given the teachings proven by the LUNA fiasco.
But certainly it will lastly persuade CEOs and treasury managers to allocate their capital correctly, carry out diligent stress checks, pay correct consideration to diversification and simply…be smart.
It should, proper? Right?
