FTX Bankruptcy Fallout Continues Unchecked in the Crypto Market

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Fallout from the $32 billion collapse of crypto exchange Sam Bankman-Frieds FTX and its associated company Alameda Research continues to spread as more companies report their exposure to its scheme operation of Ponzi.

FTX founder Sam Bankman-Fried leaves Manhattan federal court, Tuesday, Jan. 3, 2023, in New York City. [AP Photo/Craig Ruttle]

Last week, the Wall Street Journal (WSJ) reported what it called huge crypto lender Genesis Global Trading had laid off 30% of its staff and was in talks about filing for Chapter 11 bankruptcy.

Genesis had previously been hit by the failure of crypto-based hedge fund Three Arrows Capital after providing it with a $2.4 billion loan.

His financial problems were compounded with the implosion of FTX as he had loaned hundreds of millions of dollars to Alameda.

Last November, Genesis halted redemptions, hitting crypto exchange Gemini which had $900 million in client funds tied up in the business. Other companies may also be affected.

According to the WSJ article, Genesis is owned by crypto conglomerate Digital Currency Group, which operates several other crypto-based companies, including crypto news outlet Coinbase.

The collapse of FTX also sparked a run on a major crypto bank, Silvergate, whose business involved the movement of money from institutional investors to and from crypto markets.

Last Thursday, it announced that its customer deposits fell from $12 billion to just $4 billion in the fourth quarter. To cover the withdrawals, it was forced to sell $5 billion worth of financial assets with a loss of $718 million, far more than its total profits dating back to 2013.

Following the announcement, Silvergates shares fell 43% last Thursday, bringing the total decline to 84% over the past three months.

A WSJ report said the scale of the run on Silvergate was highly unusual, even by Great Depression standards. In a conference call with analysts on Thursday morning, Silvergate executives said customers weren’t just closing their accounts, but indicating they were getting out of crypto altogether and putting their money in safe assets such as bonds. of the US Treasury.

If the crypto debacle were just an isolated event, fueled by excessive speculation, it wouldn’t be of major significance.

Its significance lies in the fact that in the crypto market, trading and profiting from an asset with no intrinsic value has been the most egregious expression of processes in the broader financial system.

There is no fundamental difference between profiting from a rise in the value of a company’s stock, the rise of which has been fueled by the expectation that it will go even higher, and profiting from crypto trading in the hope that the value of the coins will continue to climb.

The Bankman-Frieds business model has been characterized as a Ponzi scheme dependent on the continued influx of money. But the same could be said of Wall Street.

Its rise and rise, especially after the Fed pumped an additional $4 trillion into financial markets at the start of the pandemic in 2020, following the market freeze in March, sent stock prices to record highs and fueled speculation in other areas. .

But in March last year, recognizing that inflation was not transitory, as it had previously argued, the US Federal Reserve, followed by other central banks, launched a new monetary tightening regime to attempting to suppress global working class wage struggles in response to the biggest price hikes in four decades.

Equity markets have taken a hit, with the S&P 500 index ending almost 20% lower in 2022. The loss in equity value has been concentrated in high-tech stocks whose market valuations are most sensitive to price increases. interest rates, as evidenced by the 33% drop. in the NASDAQ index over 2022.

According to an analysis presented in the Financial Times, the ten largest stocks by market capitalization at the start of 2022, including Tesla, Apple and Microsoft, lost a combined total of $4.9 trillion last year, or around 20%. of US GDP, and have lost another $110 billion so far this year.

Tesla shares, one of the most speculative bets in the stock market, lost two-thirds of their market value last year.

The massive losses in stock value mean that many small, so-called retail investors will have been hit hard, along with their 401K retirement plans. But market losses of nearly $5 trillion mean major investments have also been hit.

So far, these effects have yet to surface. But events in the crypto market show how quickly the situation can change. After all, just two months ago, Bankman-Fried was the toast of the financial world. He now faces criminal charges.

The cessation of the inexhaustible supply of money and the rise in interest rates, the full effects of which have not yet been felt, will have a major impact on the world economy and its financial system during the year. coming.

According to a summary of the World Bank’s biannual Global Economic Prospects report to be released today, further negative shocks could push the global economy into recession this year, with smaller countries particularly vulnerable.

He said that even without a new crisis this year, global growth is expected to decelerate sharply, reflecting a synchronous tightening of policies aimed at containing very high inflation, worsening financial conditions as well as continued disruption resulting from the war in Ukraine.

There were similar predictions from attendees, reported by Bloomberg, at the American Economic Association’s annual meeting in New Orleans that ended on Sunday.

Summarizing the findings, the report says the end of the era of ultra-low interest rates has ushered in a new world where escalating US-China rivalry and dangerous debt explosions are no longer the norm.

Former International Monetary Fund Chief Economist Kenneth Rogoff said: We live in times of many shocks. We may be at a turning point in the global economy.

Atlanta Fed Chairman Ralph Bostic, a member of the Fed’s governing body, admitted he had no real idea of ​​the direction of economic events. Because the pandemic was so unique, it’s hard to have firm expectations about how things will evolve over time.

But Bostic was sure of one thing: in line with the agenda of central banks around the world, the Fed should continue to raise rates, even if wage increases were weaker than expected.

A former Bank of England policymaker, Kristin Forbes, said the policy response to COVID had introduced new vulnerabilities and risks.

These risks stem from governments’ unwillingness to deal with the pandemic for fear that public health measures will negatively impact earnings and stock market valuations, as well as central banks’ buying of trillions of dollars. of financial assets.

The accumulation of public debt and the creation of asset bubbles via ultra-low interest rates have created vulnerabilities that could manifest sooner rather than later as the cost of credit rises, Forbes said.

The current turmoil in the crypto market, which was so heavily dependent on the low interest rate regime, is a sign of a much bigger storm approaching.

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