The Cryptocurrency Dominoes Are Falling. Who’s Next?

A funny thing happened on the way to crypto-currency nirvana. A huge financial infrastructure grew up around key cryptocurrencies such as Bitcoin.

This infrastructure resembled what exists on Wall Street. There were exchanges, custodians, de facto banks that would take crypto deposits and make crypto loans, crypto news channels, crypto hedge funds, ETFs, futures, options, websites, price tickers, technical analysis, and much more.

The crypto world resembled a real financial infrastructure with one important difference. At least when you talk about stocks, bonds or commodities, there are real companies, real borrowers, and real goods behind it. When you talk about cryptos, there’s no there, there.

Still, the infrastructure emerged. Hedge funds were devoted to investing in crypto-currencies and shares of crypto service providers. Intermediaries emerged who would take crypto “deposits” (you give them your cryptocurrencies) and would offer to pay you interest while making higher returns from crypto borrowers.

This and more were conducted with the enthusiasm and messianic fervor of explorers who had discovered a new world. But it wasn’t a new world. It was the same old banking world but without the safeguards created in the 1930s during the Great Depression.

Those safeguards included the separation of deposit-taking and securities trading, deposit insurance, bank regulation, minimum capital requirements, financial disclosure, margin rules, and other protections that Wall Street takes for granted. None of those safeguards exist in the new crypto world.

The result was predictable. There were loan losses from borrowers who didn’t pay. There were runs on the crypto-banks by depositors who wanted their cryptos back. There were redemption requests by investors in crypto hedge funds.

The response function was also predictable. The hedge funds closed the gates and suspended redemptions. The banks closed their doors and refused to pay depositors. One by one, the crypto entities filed for bankruptcy or simply went away. Depositor’s money disappeared and will likely never be recovered.

One of the notable crypto crashes is described in this article. As usual, there were contagion effects as the bankruptcy of one hedge fund led to depositor withdrawals from a crypto bank that had financed that hedge fund.

It turns out there’s nothing new under the sun after all. Banking has not changed that much since the mid-14^th century. The only difference between the crypto world and regular banking was that banking had regulations and the crypto players didn’t.

Too bad for those investors. It’s just one more reason to avoid crypto assets entirely in case the 70% price crash since last November wasn’t reason enough.

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