Nov 10, 2022 - Economy

FTX collapse is looking a lot like crypto's Lehman moment

Pixelated gold coin falling through a hole above it into darkness below

Illustration: Natalie Peeples/Axios

If Tuesday was crypto's Bear Stearns moment — the day that a central player in a financial ecosystem collapsed into the arms of a much bigger rival — then Wednesday was its Lehman Brothers moment, with that same central player simply imploding into a balance-sheet hole of unknowable size.

Why it matters: The collapse of FTX is the most consequential failure the crypto world has seen since Mt. Gox disappeared overnight in 2014.

  • "It looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting," JPMorgan analysts wrote in a research note on Wednesday.

Driving the news: Crypto exchange Binance late Wednesday backed out of a plan to rescue FTX, its smaller rival, after due diligence revealed problems it said were “beyond our ability to help.”

By the numbers: FTX has received withdrawal requests totaling $8 billion, according to a communication from its founder Sam Bankman-Fried, universally known as SBF, that was first reported by the WSJ.

  • If the window for withdrawals reopens, then that number is almost certain to rise. FTX has not allowed any withdrawals since about 6am ET on Tuesday morning.

Between the lines: The big difference between the crypto world today and the real world in 2008 is that there are no lenders of last resort in crypto who can shore up the system with bailouts.

  • It now seems highly likely that FTX will end up filing for bankruptcy, probably in the Bahamas. If that's what happens, anybody with money on the platform faces a long and highly uncertain road to any recovery.

The big picture: FTX, along with its sister company Alameda Research, was ultimately brought down by the exact same thing that killed Lehman Brothers — excess leverage.

  • It was the venue of choice for the world's most sophisticated crypto traders, all of whose trades on the platform are frozen for the foreseeable future.
  • Meanwhile, crypto prices are plummeting. Bitcoin is at its lowest level since November 2020.
  • The good news for U.S. individual investors is that they weren't allowed to use FTX. Unless you were adept with a VPN or own an offshore trading entity, you probably don't have any direct exposure to the exchange.

Where it stands: FTX US, the U.S. arm of the troubled empire, looks like it's the only part of the empire that might still hold any value. But it's tiny compared to FTX proper — and U.S. regulators are very unlikely to let it be used as some kind of bargaining chip.

The bottom line: For the time being, there's relatively little contagion from the crypto world into the real economy. But the contagion within the crypto world is only getting started.

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