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So we are now about two weeks from the start of the FTX collapse. The coverage on CoinDesk has been unparalleled.

Here are the biggest FTX-related stories of the past week according to my account:

But beyond the topics directly related to FTX, let’s talk about this contagion – this crypto credit contagion – that everyone seems to be talking about.

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Crypto Credit Contagion Is Contained in Crypto

Financial contagion is used to describe a crisis that spreads from one market or economy to another. An example: house prices started falling in 2006, in September 2007, Lehman Brothers collapsed due to losses associated with subprime loans, then many people lost their jobs (As many).

This contagion was a credit contagion that spread everywhere. The reason this kind of thing happens is due to the intricate web between countless financial institutions that sell and buy countless financial instruments from each other. When one part of the web breaks down, other parts of the web start to break down until you are left with just a jagged mess.

This is happening very clearly in crypto. Since the start of the FTX fallout, we’ve had crypto lenders BlockFi stops withdrawals from its platform citing exposure to FTX, then another crypto lender Genesis Global Capital also halted withdrawalsthen Winklevoss-owned crypto exchange Gemini closed its Gemini Earn program that offered a return to customers through, you guessed it, crypto lending through Genesis.

(Genesis Global Trading is part of Genesis Global Trading and owned by Digital Currency Group (DCG). DCG also owns CoinDesk.)

Oh, what tangled webs we weave.

But here is something different between the credit contagion of 2006 and the FTX-induced crypto credit contagion of 2022 (what lenders do, they extend credit). The credit contagion of 2006 led to a global financial crisis that was probably the most severe financial crisis since the Great Depression. Crypto simply isn’t big enough to have a serious impact on the wider economy.

You do not believe me ?

Here are some proof points:

(CoinDesk Research and TradingView)

(CoinDesk Research and TradingView)

  • On Thursday Nov. January 10, the US Department of Labor reported that the Consumer Price Index (which measures inflation) slowed down to “only 7.7%”, which was below expectations, so the S&P 500 (a stock market index) rose from $3,760 to over $4,000 the next day and is now around $3,950. Bitcoin saw a similar price move, rising from $16,000 on Thursday to over $18,000 on Friday. The difference being that the price of bitcoin is now around $16,600 at the time of writing.

  • The Day FTX Collapsed, most mainstream publications focused more on something else: the US midterm elections. I know it’s anecdotal, but you’ll just have to trust me on this one.

  • Businesses in general are even more concerned about recessionary pressures from the supply side. The only companies talking about crypto are crypto companies (and maybe The new owner of Twitter).

I’m not saying crypto credit contagion isn’t bad. In fact, it’s bad. Many ordinary people have lost money. Even the Ontario teachers’ pension fund lost $95 million invest in FTX (although this is only <0.05% of the fund's total net assets). But overall it's really not as as bad as some might make it out to be. I believe that this crypto credit contagion will be contained within the crypto, which would by definition disqualify it as a contagion.

This too should pass.

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