Matt Levine’s Money Stuff: FTX Creates Crypto Contagion

Contagion

I asked yesterday if there has ever been a liquidity crisis at a crypto firm. I didn’t really get any answers. But you could imagine how it might go:

1. A well capitalized conservatively managed crypto lender takes in deposits of crypto and lends them out to other crypto trading firms, against good collateral.

• 2. The firm is borrowing short to lend long: Its deposits can be recalled on demand, but its loans have longer terms and can’t be recalled immediately.

• 3. Everything is fine and great, the loans are performing, the collateral is good.

• 4. A huge huge huge ...