The Crypto Meltdown Is Not Over. The Dominos Are Still Falling.

The crypto world is crashing. Admittedly, this crash is happening in slow motion as crashes in large-scale systems often do.

The September 1998 collapse of Long-Term Capital Management was the end of a sequence of panics that began in Thailand in June 1997. The September 2008 collapse of Lehman Brothers was the end of a sequence that began in July 2007 and included the failure of Bear Stearns (March 2008) and Fannie Mae and Freddie Mac (June 2008).

We all know about the super-collapse of crypto exchange FTX and its affiliated hedge fund Alameda in November 2022, perhaps the largest financial fraud in history. But the FTX story did not come out of the blue. It followed the 67% crash of Bitcoin between November 2021 and November 2022 and the subsequent failure of the Three Arrows crypto hedge fund in July 2022.

Three Arrows failed after the implosion of the $60 billion Terra crypto ecosystem. Other high-profile crypto firm bankruptcies include BlockFi, Celsius, and Genesis.

In short, we are witnessing sequential failure and financial contagion over a period of 18 months and counting. Some analysts are referring to this sequence as the “Crypto Winter.”

The latest victim is Silvergate Bank, as reported here, Silvergate was a crypto-bank with a conventional banking license and FDIC insurance on deposits. Silvergate took deposits and made loans in dollars and cryptocurrencies. It also kept deposits in crypto exchanges, some of which themselves went bankrupt.

A run on the bank began. Silvergate has now closed its doors and announced that it will wind down its operations and liquidate on a voluntary basis. Another one bites the dust.

This will not be the last crypto failure. The cascade of failure may be proceeding slowly but it is proceeding. If you’re not in the crypto market, keep out. If you’re in the crypto market, get out. The crypto market is like a casino where you can make or lose money, but it’s definitely not an investable asset.

That will be ever more apparent as the list of failed firms expands. Ironically, Silicon Valley Bank, the longstanding and preeminent lender to tech start-ups, is the next shoe to drop. I’ll have much more to say about SVB’s collapse in the coming days.

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