What contagion looks like
The FTX fallout is starting to hit large hedge funds, lending platforms, other exchanges
While the FTX story is still be written, we’re seeing how quickly financial contagion can occur akin to the day-by-day drama of September 2008. What’s the reaction order of operations?
The immediate pain hit 1) retail clients of FTX 2) institutional clients of FTX & Alameda counterparties. Those included other FTX entities like BlockFi and large hedge funds like Ikigai Capital, which in turn touched unnamed institutional clients with large write downs.
Next, we’re seeing 3) lending platforms like Genesis and SALT start to fail from increased redemptions which are likely caused by some mix of a) increased skepticism in the space, b) a need for liquidity as other sources have dried up, c) forced redemptions to cover margin calls as the broader space plummets.
That’s spilling over into 4) exchanges like Gemini which offer yield products in partnership with these lending and staking platforms. They’re now trying to ensure Earn clients are able to redeem as much as possible from Genesis, which appears to be on the verge of filing bankruptcy. That will continue to shake retail and institutional confidence even in the largest remaining exchanges.
The vast majority of crypto institutions are about to have large % of their assets locked up in bankruptcy filings which will take months or years to resolve. In the meantime, their other assets are at peak volatility and down in value massively as a result of this black swan event. So I’d expect to see more 5) crypto venture and hedge funds forced to consolidate with funds below the threshold they need to operate.
That will of course trickle into 6) crypto startups which lack adequate funding sources in a shrinking market and 7) crypto employees who already likely face large rounds of layoffs.
Much has been made of how much this crisis is related to the centralized exchanges and entities behind crypto. It remains to be seen how deeply this will cut into DeFi and NFT-land. So far, DeFi appears to be algorithmically holding in and NFT prices are acting fairly idiosyncratically which suggests both will weather the storm somewhat separately.
Finally, I’ll be curious to see how this crypto bear market exists within the broader context of what seems like continued macroeconomic rockiness ahead. Per the last cycle, I see mass consolidation and big winners emerging in the next few quarters. After FTX, I’m mostly wondering who will be left to consolidate under?