In early November, after the sudden collapse of the FTX cryptocurrency exchange, Jeremy Allaire, the founder and CEO of Circle, called this cryptocurrency "Lehman Brothers Moment.โ Within the closed world of cryptocurrencies, that is not an exaggeration; every day seems to bring news of new disasters. However, this has been pretty tame compared to the cascade of market crashes that followed the collapse of Lehman Brothers.
When credit dried up back then, someone in the corporate bond markets told me that he had "stared into the abyss" when his broker threw $1 million face value corporate bonds on the market, and "didn't get a single offer back". (not even a penny).โ Dazed, he staggered back to his office and watched the evaporation of everything he'd thought he'd understood.
โI realized that my previous assumptions about life, society, markets, government, etc. road too much for granted,โ he told me.
When I asked that same financier how the crypto crash was affecting his business today, he said โzero,โ except, he added dryly, the amount of time people were wasting exchanging jokes about now-disgraced FTX founder Sam Bankman. -Fried.
It doesn't really show up in the market data either. I spent some time trying to correlate the FTX collapse with various indicators, from US Treasury yields to the value of the dollar, looking for signs that the events of November 7, when FTX began to melt into Seriously, they were infecting broader markets. .
It takes squinting to see many signs of the cryptopocalypse.
This is what happened to Treasury yields in 2008 after the collapse of Lehman Brothers and the markets self-immolation:
You can physically see how nervous the market became. Here, in contrast, is what happened after the FTX implosion:
There is something interesting to see here: a phenomenon known as โinverted yield curveโ, where the yields on long-term Treasury debt are lower than the yields on shorter-term instruments. That is apparently irrational: why would you be willing to lock up your money any longer in exchange for lower returns? โ and is usually a sign that investors expect a recession in the near term (or, alternatively, a drop in inflation). But what is happening in the bond market is not about FTX; it's about economic data and Fed policy.
Stock markets, meanwhile, have been unfazed by cryptocurrency gyrations and serial trading failures.
Heck, even bitcoin looks pretty good:
It dropped significantly, but then quickly leveled off. Possibly, Bitcoin will end up acting as the crypto equivalent of US Treasuries, where panicked investors flee when all else goes wrong.
Meanwhile, the rest of the cryptocurrencies acts as a sideshow. Sure, it could be the future. But it is having astonishingly little impact at present.
Like my friend, Tim Lee, he pointed In a recent newsletter, โafter a decade of experimentation, it seems we are no closer to building blockchain-based applications that are useful to ordinary Americans. The apps that have thrived have mostly been tools that allow people to speculate on the value of tokens.โ Which sums up exactly what is happening in the markets right now; this looks less like the collapse of a major financial market than the collapse of a major casino chain.
When a casino chain fails, its shareholders lose money, as does any player with chips that are now worthless. Its workers face unemployment and hardship; Your creditors could get scammed. But the risk is contained for those in the casino's immediate orbit. Apart from a few key products, no single business failure can significantly alter the course of the global economy.
That is, unless that business is a bank. Financial market failures have the unfortunate habit of cascading, first to nearby financial firms and, if the failures are severe, to other parts of the financial system. Despite the bloodbath in the cryptocurrency sector, there currently appears to be little danger of a broader contagion, which tells you something important.
For most of the existence of cryptocurrency, we have been debating what kind of financial product it is: a medium of exchange, like the dollar, or a store of value, like gold or stock certificates. At this point, the answer seems to be neither. Unless you're buying drugs, making ransomware payments, or trying to smuggle money out of a country with strict currency restrictions, you're almost certainly not using crypto to pay for anything. And it certainly hasn't proven to be a good store of value, as it's down at least two-thirds from last year's peak, particularly disappointing given that inflation is high and Bitcoin, with its inherently limited supply of coins, has been touted for years. a long time. as a great hedge against inflation.
More generally, crypto markets do not act as financial markets, that is, as integral parts of a global system for moving capital from savers to investors and vice versa. That's not to say that cryptocurrencies will never be part of that system: the technology is not even two decades old, and maybe it will become work. But so far we haven't discovered a place that really fits. For now, what happens in crypto stays in crypto.
