Because the worst of the cryptocurrency crisis is yet to come
Is the cryptocurrency crisis likely to infect the rest of the financial system? Luca Ciarrocca's article for Tomorrow
A year ago, in November 2021, in the craziest phase of the great cryptocurrency rise, the capitalization of thousands of virtual tokens and coins, from bitcoin down to the latest born in the course of one night, had touched a total of 3,000 billion dollars globally. Today the value of the sector has collapsed to 850 billion, a decline of 72 percent.
Many cryptocurrencies have turned out to be Ponzi schemes, scams, digital tricks often implemented by doc criminals and in most cases by skilled scammers who had the sole objective of taking advantage of the best way available on the financial market to make easy money in a short time at the expense of thousands of naive people.
All imaginable types of crypto have imploded in the last few days. The so-called stablecoins, which in theory should have been tied to an equal relationship with the US dollar, have collapsed.
Among the consequences are a series of bankruptcies among crypto exchanges (centralized trading platforms), in financial companies dedicated to crypto lending or crypto mining, hedge funds specializing in crypto investments and so on.
Each company was interconnected in some way to the others, directly or indirectly, each lending money to all, in most cases using customers' money, funneling money to the more aggressive hedge funds which in turn made huge speculative bets with high leverage , sometimes 1-50 and up to 1 in 100. This is why we can speak of contagion.
AFTER THE FALL
For years we have observed a rise in all virtual currencies, also fueled by false propaganda based on the belief that cryptocurrencies are an instrument of anti-system freedom and rebellion against central banks.
Today we are at a decisive turning point, the disastrous fall and the great and chaotic dust that has arisen will not pass quickly. On the good side, the contagion is not currently being transmitted to other players in the global market: commercial banks, large financial companies, mutual funds or other players in the economic and financial world seem to be exempt from it.
But ever since the platform founder and CEO of Sam Bankman-Fried (FTX, the second largest in the world) and its affiliate Alameda Research spectacularly imploded and then went bankrupt, things have dramatically changed.
Given that investors worth several billion in FTX are giants like Softbank or BlackRock, someone has even evoked the comparison with the Lehman Brothers crack, which in September 2008 triggered the Great Recession.
In any case, it is a scenario of absolute chaos that will cause vast collateral damage, with the probable discovery of other stranded situations, shady schemes like financial chain letters, scams and use of client money, losses of tens of billions in one crypto or another, far beyond what we see today.
The money vanished into thin air tied to hundreds of virtual coins incinerated by the complicated crypto crash is astounding. All in the almost total absence of intervention by the supervisory authorities and politics.
In the United States and in all capitalist countries (China has always been against and bans cryptocurrencies) parliaments ignore or almost ignore the problem.
WHO PAYS
Perhaps the worst is yet to come: the differences with the collapse of Lehman Brothers, which precipitated the financial crisis in 2008, depend on the fact that the crypto sector is small and reserved for a few specialized speculators.
The American stock market has a total capitalization of about 40,000 billion dollars, the crypto market, at its peak, never reached a tenth of this figure and now capitalizes just 2 percent of all Wall Street. Not enough to make the contagion lethal.
If hypothetically all virtual currencies went to zero, most investors operating outside the crypto zone would not even notice.
Perhaps the most concerned are money launderers, drug dealers and Dark Web traffickers, such as illegal gambling sites or sellers of weapons and arms.
Their money has disappeared into thin air, if they had received payments in Bitcoin at $69,000 hidden in some offshore company in tax havens, now they find the most widespread of the cryptocurrencies just above 16,000 (-76 percent from the peak).
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia-on-demand/crisi-criptovalute-momento-lehman-brothers/ on Sun, 20 Nov 2022 07:11:58 +0000.