Early Investing

There Is No Crypto “Contagion”

There Is No Crypto “Contagion”

Crypto Market Musings

Crypto’s recent correlation with the stock market is finally paying dividends. The stock market is rallying — and so is crypto. As of this writing, bitcoin is up almost 11% over the last five days and is trading above $21,000. Ethereum is up 13% over the last five days and is trading above $1,200. And Monero is up almost 11% and is trading around $129. 

Enjoy the rally while it lasts. The assasination of Japan’s former prime minister Shinzo Abe could scuttle it. The next round of inflation data drops on July 13. And the Fed will announce the next round of interest rate hikes at the end of the month. If the stock market reacts negatively to any one of these events (and it likely will), stock prices will go down. And so will crypto prices.

Solana is up 13% over the last seven days despite facing a class action lawsuit filed by investors in California. The lawsuit alleges that Solana is too centralized, which makes it an unregistered security. It also alleges Solana made misleading statements about its circulating supply. So far, it appears investors are unfazed by the lawsuit and any potential problems that might result from it.

What Vin Is Thinking About

The word contagion has been thrown around recently to describe some of what’s happening in the crypto markets. 

A contagion is a disease or a disease-producing agent that spreads rapidly. In the case of crypto, some are suggesting that Three Arrows Capital (3AC) is a potential contagion. 

Three Arrows Capital is a crypto hedge fund that filed for bankruptcy last week (because of the Terra collapse). Three Arrows owed crypto platform Voyager Digital $657 million. This week, Voyager Digital filed for bankruptcy.

Now word is out that Alameda Research owes Voyager Digital $377 million. Alameda Research was founded by Sam Bankman-Fried, the founder and CEO of crypto exchange FTX. And people are worried that the dominoes aren’t done falling.

I have one message for anyone thinking there’s a contagion flowing through crypto: Slow your roll.

Crypto is now big business (or at least bigger business). That means it’s a much larger and more interconnected ecosystem than it used to be. So if something bad happens to a company or project, that bad news will affect more than just the people who are directly working on the project (or who are invested in it).

This happens all the time in the world outside of crypto. Bankruptcies happen. As do supply chain issues, creditors defaulting and a myriad of other issues.

Crypto is still in its infancy. So a crisis like this feels existential. But it isn’t. It’s just the first time crypto is going through something like this. Plus, the crypto industry isn’t as mature as the existing economy. So it will feel the effects of these bankruptcies more acutely.

But that doesn’t mean there is a contagion. The more likely scenario is the damage created by the 3AC bankruptcy will end relatively soon or be contained. The 3AC/Voyager bankruptcies won’t take down Bankman-Fried. And Bankman-Fried has been working hard behind the scenes to shore up other parts of the ecosystem.

As the crypto sector matures, bankruptcies will stop sparking contagion fears and feel more “normal” — just as they do in the traditional economy.

And Finally…

Grayscale is tired of waiting for the SEC to approve its spot bitcoin ETF. So it’s suing the agency.

Good for Grayscale. The SEC has already approved ETFs based on bitcoin futures markets. There’s no reason for the SEC to reject bitcoin spot ETFs — which are based on the actual asset! 

The SEC’s obstructionism makes no sense here. And every investor — crypto and otherwise — should be rooting for Grayscale to win its case.

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