Updated: Aug 7, 2022
Speculative bubbles are unsustainable, and this one isn’t getting any better.
In 2008, the main cause of the end result was over-leverage. If you have $100 million, you have enough money to get whatever you want. You could use that $100 million to get $1 Billion in loans and use those loans to buy up $10 billion in assets by only putting down the down payment on the homes. This is good if things are going well because now you can make tons of money on your less money, but if things don’t go well, it only takes a minor downturn to completely wipe out all of your money.
After 2008, this became a bit harder to do, and people learned that it's all around not a great idea. Well, until Crypto came around. Crypto is the wild west and really hasn’t been regulated until recently, and even then, it’s minor. Crypto itself hasn't been shut down as securities, although some projects like pre-sales, NFTs, investment contracts, interest-bearing accounts, and other things have been shut down by states in some instances.
A few states that have taken a particularly strong approach to this are: Alabama, Wisconsin, Texas, Vermont, Idaho, Arizona, and Colorado. These states have announced enforcement actions like fines and cease and desists to companies like BlockFi, Voyager, several NFT projects and token pre-sales, a host, and so on. Alabama, for example, has issued 26 cease and desist orders in the past 3 years against crypto projects alone. While this might not seem like a lot, prior to 2018, there were literally 0 across most states. However, 26 is still relatively small in the grand scheme of Crypto.
Since Crypto is generally anonymous, hard to track, and unregulated, this has led to tons of companies repeating many of the same mistakes that led to the 2008 collapse, just in the context of Crypto. One of the most public examples is 3 Arrows Capital, a $2 billion hedge fund centered entirely around Crypto. Of that $2 Billion, there is a $670 million loan from Voyager they recently defaulted on, and loans from Genesis, Voyager, Celsius, BlockFi, Babel, and Deribit. This means, at a minimum, that 50% of the money they were trading with was a loan, and it’s likely a lot more because these firms confirmed to have margin called and liquidated 3AC at various times. The initial downfall came from the Luna collapse, which caused $200 million in losses for 3AC overnight. This caused Voyager, Celsius, BlockFi, Babel, and several others to all slowly collapse over the next few weeks. There have been freezes of trading, withdrawals, and other services due to this of many of these platforms, and several are slowly moving towards, or in, bankruptcy.
Now, as these all go into decline and bankruptcy, it causes the price of Crypto like Bitcoin to decline because these companies are getting liquidated. So, as Bitcoin goes down, all of the other Crypto companies with investments in Bitcoin continue to lose money, and investors leave the area thinking there’s no money to be made. As this happens, other exchanges, hedgefunds, and entities struggle and go under, it will cause further liquidations. Even entities that have been doing fine up to this point are starting to struggle with hiring freezes and layoffs at places like Coinbase, Crypto.com, and other large crypto companies.
This is all eerily similar to the 2008 crash, except this might get worse because there’s no bailout in sight. Most legislators were willing to bail out massive banks because they transact in dollars, and that could be people's bank accounts and other things on the line. Not only has the government, for obvious reasons, not been open to accepting crypto, they likely want it to just outright die. Most of the entities, due to the lack of usefulness inherent in crypto, are all “crypto” entities and thus not exposed to more mainstream entities. Banks, for example, haven’t really been able to use, buy, or invest in crypto directly due to existing regulations. Some states have outright banned entities within their states from accepting payment in Crypto, and those (like Ohio) that attempted to establish Crypto payments for things like taxes, failed almost immediately. This means most of the existing infrastructure can watch the whole thing crash and burn with little to no blowback. Not to mention, there is almost no widespread support to bail out crypto, and thus that scenario is incredibly unlikely.
This basically chalks up to a domino effect knocking down each entity after it until new money decides to come in and bail the industry out. Will that happen? Obviously, I have no idea, but I don’t see it picking up anytime soon. As the dominos tumble, and no entities have any incentive to bail them out, it looks like this could be just getting started.