FTX collapse looks a lot like crypto’s Lehman moment

If Tuesday was crypto’s Bear Stearns moment – ​​the day a central player in a financial ecosystem collapsed into the arms of a much larger rival – then Wednesday was its Lehman Brothers moment, with the same central player simply imploding into a balance sheet hole of unknown size.

Why it’s important: The collapse of FTX is the biggest failure of consequence the crypto world has seen since Mt. Gox disappeared overnight in 2014.

• “It appears 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 backed out late Wednesday from a plan to rescue FTX, its smaller rival, after due diligence revealed problems it said were “beyond our ability to assist.”

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

• If the withdrawal window opens again, it is almost certain that the number will rise. FTX has not allowed any withdrawals since approx. 6:00 a.m. ET 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 to support the bailout system.

• It now seems highly likely that FTX will end up filing for bankruptcy, probably in the Bahamas. If that’s what happens, everyone with money on the platform faces a long and very uncertain road to 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 preferred location for the world’s most sophisticated crypto traders, whose trades on the platform are frozen for the foreseeable future.
• Meanwhile, crypto prices are plunging. Bitcoin is at its lowest level since November 2020.
• The good news for US individual investors is that they were not allowed to use FTX. Unless you were skilled with a VPN or own an offshore trading entity, you probably don’t have any direct exposure to the stock market.

Where it says: FTX US, the American arm of the troubled empire, looks like it’s the only part of the empire that might still have some value. But it’s small compared to FTX itself – and US regulators are highly unlikely to allow it to be used as some sort of bargaining chip.

Bottom line: For now, there is relatively little contagion from the crypto world to the real economy. But the infection within the crypto world is just getting started.