“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” – Satoshi Nakamoto, circa 2009
“They mistook leverage for genius.” – Steve Eisman, FrontPoint Partners, circa 2008 (portrayed by Steve Carrell in “The Big Short”)
“We are in the process of communicating with relevant parties and fully committed to working this out.” – Zhu Su, Three Arrows Capital, June 15, 2022
Over the past eight weeks a series of seemingly robust pillars of the cryptocurrency industry have fallen. They knocked each other over like dominoes, and as they hit the ground they shattered. Our pillars, it turns out, were made of glass.
A misguided bet nukes the balance sheet of a “hedge fund” that forgot to hedge. Tanking markets trigger margin calls for shadow banks masquerading as crypto lenders, which in turn freeze customer balances. Long-dated illiquid bonds leave nearly everybody in the lurch. Counterparties default on massive loans.
And, just like that, hundreds of billions of dollars’ worth of notional value is gone.
On July 6, FTX exchange founder and CEO Sam Bankman-Fried declared that this catastrophic crypto industry unwind was nearly over. Even if that’s true, the work of understanding what actually happened has barely begun. Thanks to crypto infrastructure, the web of relationships and obligations have been somewhat more visible than would have been the case in…
