Home REITs Crypto Crisis Brings Back Ghosts of Lehman Brothers

Crypto Crisis Brings Back Ghosts of Lehman Brothers

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Crypto Crisis Brings Back Ghosts of Lehman Brothers

The crisis in the crypto industry is a very painful situation for Gen Z, many of whom have made and lost their first investment.

For millennials and older investors, the struggles in the crypto galaxy are reminiscent of the 2008 financial crisis.

The cryptocurrency liquidity crisis began in May when sister tokens Luna and UST collapsed, erasing at least $55 billion in value and threatening the futures of several high-profile companies. This is facilitated by the lack of rigorous risk management in this young and hitherto poorly regulated industry.

Rigorous risk management showed that a hedge fund, Three Arrows Capital, or 3AC, borrowed money from different companies — BlockFi, Voyager Digital, Babel Finance, etc. — while using the same bitcoin as collateral.


“Similarities” to the 2008 Financial Crisis Retail Crypto Investors vs CDO Investors Transparency and Risk Management Issues Differences Between 2008 and the Crypto Crisis Can the Crypto Crisis Spread to the Real Economy?

Industry experts say it feels like déjà vu. There are parallels with the 2021 Archegos capital management scandal, but analogies with the 2008 financial crisis have also emerged.

TheStreet spoke to industry insiders about the current situation. They say so.

A “parallel” to the 2008 financial crisis

“There are some parallels with the 2008 financial crisis,” said Mark Fidelman, founder of Miami-based crypto marketing strategist SmartBlocks.

“Both of them went into crisis with bad investment schemes — derivatives and extreme leverage — but in the 2008 crisis, we had Wall Street cheat by labeling mortgage securities as AAA instead of junk.

“The crypto crisis of 2022 started when someone explored Luna’s algorithm. This created a domino effect for all UST-dependent crypto funds and unrealistic returns.”

“There’s a lot of leverage or loans in the system, and there’s a lot of debt in the system that shouldn’t be there,” said Mike Boroughs, chief portfolio manager at Fortis Digital Asset Fund.

Crypto Down Lead JS

“In 2007, major investment banks created complex derivatives such as synthetics,” said Shane Molidor, CEO of cryptocurrency finance platform AscendEX (formerly BitMax). [collateralized debt obligations]no one, especially the government, really understands this.

“When things start to break down and mortgage owners start to default, the market has no idea about the risk of systemic contagion.

“Unfortunately, we now find ourselves in a similar situation when it comes to cryptocurrencies. Many major lenders have released little information about their lending activity, and markets are in the dark as participants try to ‘price’ the risk of further contagion .”

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Retail Crypto Investors vs CDO Investors

Molidor said retail investors who regularly invest their savings in cryptocurrencies face the same fate as CDO investors.

“Just as many CDO investors are unaware of their exposure to subprime mortgage defaults, many retail clients who deposit funds with major cryptocurrency lenders never know where the proceeds come from and are completely unaware of 3AC’s true degenerate trading activity Funded it in part. Juicy APY.”

Michael Wilson, president and COO of green global exchange 1GCX, concluded: “There are similarities to what we’re seeing in the cryptocurrency space right now, where the underlying emotion for failure is from greed to inner panic.”

Fidelman added: “The actors in 2008 deliberately deceived institutions and the people. And in 2022, evil users took advantage of flawed systems. Very different in my opinion. Although in both cases, large institutions did not do Good work.”

Crypto Down Lead JS

Transparency and risk management issues

Kenneth Goodwin, director of regulatory and institutional affairs at Blockchain Intelligence Group, said: “In both cases, the public (including consumers, retail and institutional investors) was guided by targeted marketing and communications, believing that these products (algorithmically stable) coins and housing loans/[asset-backed securities]/[mortgage-backed securities]) provides higher yields. ”

Goodwin, who worked at the Federal Reserve Bank of New York during the 2008 financial crisis, added that in both cases there was “no way” to disclose market-driven risks. He believes that cryptocurrency lenders Celsius and Babel Finance and hedge fund Three Arrows Capital are similar to Lehman Brothers, Bear Stearns and many “too big to fail banks” in that they all have higher leverage than they report.

“One thing that both situations have in common is that neither their money management operations, their trading positions nor their ongoing monitoring of their portfolios are transparent,” he said.

Crypto Down Lead JS

Differences between 2008 and the crypto crisis

“One difference, however, is that the crypto community is not regulated, so there is no liquidity backing,” Goodwin said.

“This contagion is much less widespread in the crypto market, mostly caused by the risk of mismanagement by individual lenders/custodians,” Wilson added.

Crypto Down Lead JS

Will the crypto crisis spread to the real economy?

Dan Hoover, director of Castle Funds, a firm that invests in bitcoin and other digital currencies, said: “Failed crypto investors are farther at risk than they were in 2008.”

“The 2008 crisis affected major financial institutions such as Wells Fargo (WFC) – Access to Wells Fargo and Company ReportsBank of America (BAC) – Get Bank of America Corporation ReportCitibank (C) – Access to Citigroup Reports. These institutions are key liquidity providers to the “everyday” economy, and their losses on mortgage lending have crippled their ability to perform this critical function.

“Finally, regulators in the U.S. and elsewhere have increased capital requirements, reducing the overall leverage of major market players and systemically important institutions.

“This should mitigate risk to another undercapitalized entity, such as AIG Financial Products (AIG) – Get the American International Group Inc. report, counterparties as market participants played an outsized role and then failed. “

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