What is a crypto infection? How does it spread after the collapse of FTX

When a large institution like cryptocurrency exchange FTX ExplodesHe drags others with him.

This dynamic is what in finance is called contagion, or the tendency for a financial crisis to spread to other institutions, markets, and regions.

Since FTX filed for bankruptcy on November 11, there has been a growing list of other companies that have had to disclose their “exposure” to FTX and associated companies FTX US and Alameda Research. In this case, exposure means that the company has lent money, received commitments from, invested in, or deposited money with FTX.

For example, Genesis Trading said on November 10 that its trading desk has $175 million in “closed funds” in their FTX trading account. The company was later forced to suspend withdrawals from its lending arm, citing “Unprecedented market turmoil. “

On the same day, the cryptocurrency exchange and stablecoin publisher announced Gemini Earn product withdrawals may be delayed, an indirect influence of Genesis, Gemini Earn’s lending partner, in stopping withdrawals. It was a day after Gemini He first said it wasn’t fair To FTX – It turns out he was exposed to Genesis, and Genesis was exposed to FTX.

As a side effect of the Gemini news, traders have been on decentralized financial lending protocol Aave It is set up for the short Gemini dollarGUSD, in anticipation of the company becoming another victim of the FTX infection.

Now there data in the series Which indicates that the events leading to the FTX crash were originally caused by the Terraform Labs crash, which occurred in May 2022.

It could mean, as is often the case, that one source of financial infection, FTX, is once again linked to another center of infection, with the algorithm TerraUSD losing its 1:1 correlation with the USD, wiping out $40 billion in a matter of days. .

After the collapse of TerraUSD, the resulting infection led to Three Arrows Capital Hedge FundAnd the Centennial Lender NetworkAnd the crypto broker Voyager Digital To file for bankruptcy in the next two months.

Even before Terra and FTX, there have been other examples of infection through crypto markets.

In 2013, the FBI shut down Silk Road, a dark web marketplace accessible through the Tor privacy browser, and arrested Ross Ulbricht. Buyers and sellers used bitcoin for transactions, as it gave them more anonymity than using fiat currencies.

As the chart from crypto-data and analytics company Mosaic shows, Silk Road was shut down before another 96,000 BTC hack from another dark market, Get Marketplace; China’s central bank bans institutions from processing bitcoin transactions; BitInstant CEO Charlie Shrem He was sentenced to prison for making an exchange; Finally, in February 2014, 850,000 BTC were stolen from the Mt. Gox.

In terms of size, Mt. Gox is still big on crypto.

At the time of the hack, the exchange accounted for 70% of all bitcoin trading. Been running since 2010 and have had some hiccups, including 80,000 BTC is stolen 2011. But the company came to an abrupt end when 840,000 bitcoins — 740,000 from customers and the rest from the company — were stolen in 2014.

Prior to the hack, bitcoin’s price reached an all-time high of $1,000 in November 2013 — around the time Silk Road founder Ulbricht was arrested. But after two months of Mt. Gox shut down, BTC price plummeted to $360 and sent a chill in the market.

Coinbase, at the time a new cryptocurrency exchange, posted one Joint statement Condemns the “tragic breach of user trust” involving Kraken, Bitstamp, Blockchain.info (which later became Blockchain.com), Circle, and BTC China (which later changed its name to BTCC).

Ironically, their statement describes exactly the kind of shady accounting practices that have since emerged in the FTX collapse: “Acting as a trustee must require a high standard, including appropriate safeguards that are independently audited and regularly tested, adequate budgets and reserves as business entities, transparent client information.” Responsibility and clear policies for not using clients’ assets for private trading or for margin lending in leveraged trading.”

The origin of “infection”

Contagion isn’t just a term coined by the cryptocurrency industry, though it certainly got a lot of play during the current brutal bear market.

In the broader context of economics, “contagion” describes how a crisis begins in one enterprise, market, or region and then spreads to others.

The phrase has been used again and again to describe the crypto ecosystem in 2022, but that is not where the term originated from.

The word itself comes from epidemiology, the branch of medicine that focuses on the spread of disease. For example, public health experts have laser focused on stopping COVID-19 infection since the beginning of the pandemic in 2020.

Economists began using the word “contagion” after Thailand’s currency, the baht, collapsed in July 1997 in what is now known as the 1997 Asian Financial Crisis. The resulting financial crisis spread across East Asia to Russia and eventually South America.

the summary:

  • Infection is the real or perceived spread of a malicious cryptographic event from one company to another
  • Examples of infections include the consequences of the FTX crash and the Silk Road failure

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