You Knew This Was Coming. Get Ready For Far More.

As reported here, crypto exchange BlockFi has filed for bankruptcy.

BlockFi had been on the ropes for some time. It had suspended redemptions by its customers on November 11 because it lacked available funds to repay those customers. It had agreed to be acquired by a bigger crypto exchange, FTX, but that deal was abandoned after FTX was revealed to be the biggest crypto fraud of all.

In the end, BlockFi was illiquid with a crashing valuation and no way to pay customers. So, it closed its doors and filed for bankruptcy.

There are a number of important lessons for investors to take from this, even if you have no direct involvement with cryptocurrencies. The first is that the crypto world is densely connected. One exchange will leave its funds on deposit with another exchange and so on in a daisy chain of interlocking deposits.

Of course, if one link in the chain fails, the entire chain fails, and no one is repaid. That’s bad enough. But, what has been happening in crypto land is even worse.

The parties who receive deposits from others borrow against those deposits. This introduces leverage so that the amounts involved in a collapse are far greater than the amounts originally received.

Many of the participants in this reckless conduct offered to pay customers interest. How could they offer interest when the actual cryptos are not securities and don’t earn anything themselves? Don’t ask.

A party paying “interest” would receive a yield from another party paying “interest” so that the interest component was also added to the original fraud. Interlocking deposits, borrowings, leverage, interest, derivatives and more were all part of the crypto scam.

In addition, many of the “billion dollar” losses you read about in crypto world are not actually dollars. They are losses, loans and deposits in cryptocurrencies that are valued in dollars at highly inflated values of the cryptos (another form of leverage). What’s left is a house of cards that is now tumbling down.

LUNA and Three Arrows failed before FTX. BlockFi and others have failed since. Genesis may be the next in line.

This slow-motion sequential collapse is far from over. It’s just a matter of time before the crypto-world collapse leaks into the mainstream financial world of banks, brokers and hedge funds. Give it time.

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