What Happens In Crypto-Land Doesn’t Stay In Crypto-Land. It’s Contagious.

The Bitcoin and crypto crashes continue. Bitcoin has dropped from $67,000 on November 8, 2021, to $21,000 today, a plunge of 68% in just over seven months.

Much of that plunge has been concentrated in just the past six weeks. Bitcoin fell from $40,000 on May 4 to today’s level, a 47% nosedive. There’s no end in sight.

Of course, the damage has not been limited to Bitcoin. Other crypto-currencies have fallen as much or more than Bitcoin. Still, the collapse has gone far beyond crypto prices.

The Luna/Terra fiasco (in which the “stablecoin” Terra became insolvent and took down the Luna coin ecosystem with it), the Celsius insolvency (in which a crypto “secured lender” closed gates and ended redemptions by investors), and the Three Arrows collapse (in which a crypto hedge fund faced redemptions and now faces bankruptcy) are all examples of how financial distress spreads.

There is a large crypto-infrastructure consisting of hedge funds, exchanges, lenders, stablecoins, and analysts that has wrapped itself around the base of tokens and pretends to function like a normal financial system. The problem is that it has all of the same problems as any financial system, including bank runs, illiquidity, insolvency, panic, overleverage, credit losses, and margin calls.

The eggheads (applied mathematicians and developers) know a lot about technology and almost nothing about money. The biggest losers of all from this turmoil may be Michael Saylor and his public company MicroStrategy, Inc.

As described in this story, Saylor made a $4 billion Bitcoin bet with company funds and has lost over $2 billion on a mark-to-market basis. Worse yet, Saylor borrowed money to finance the bet and now faces margin calls from his lenders, including another crypto firm called Silvergate.

This is a good example of how contagion works in financial markets to spread losses. In this case, the losses have spread from Bitcoin itself to Saylor to his lender and probably beyond.

The difficulty for investors is that there are numerous linkages between the crypto-world and the mainstream world of dollar-based finance. As these losses continue (we expect they will), it’s just a matter of time before retail investors, Wall Street banks, and more traditional hedge funds suffer as well.

If you believe you’re unaffected by turmoil in crypto markets, don’t be so sure. Just like a real virus, financial contagion goes where it wants and does not stop in neatly defined market segments.

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