Know More About the Crypto Contagion and How It Spread After the FTX Collapse

Crypto enthusiasts may have recently heard the big news about the collapse of FTX as the company entered bankruptcy proceedings in the US court system on November 11th. Sam Bankman-Fried, the company's founder and CEO, resigned from his position, and John Ray III, who has experience running bankrupt businesses, was chosen to take his place.

It is widely known that other exchanges might have ended the same way by the time FTX fell. In the context of finance, there is the term “Contagion” which refers to the tendency for a financial crisis that will have a significant impact on exchanges, markets, and other areas.

Since FTX has been in bankruptcy proceedings on November 11th, a list of businesses that need to be disclosed to FTX, along with FTX US and Alameda Research, has been established. The risky businesses in this case are those that provide loans, have obligations, and invest in or deposit funds with FTX.

For example, Genesis Trading reported on November 10th that the trading desk had "locked funds" totaling 175 million US dollars in FTX trading accounts on the same day. The effect from Genesis, which is Gemini Earn's lending alliance, temporarily suspends the money redemption and credit approval, so cryptocurrency exchanges and Stablecoin Gemini issuer warned their customers that withdrawing from Gemini Earn might take longer than usual. Accordingly, the collapse of FTX has resulted in "unprecedented market turmoil."

According to Gemini's news, "Aave," the decentralized finance lending protocol users, queued up to borrow Gemini Dollars, GUSD, to resell at a higher price. They expected purchasing for speculative purposes once the coin price dropped because it is possible that the company could suffer another setback as a result of the FTX contagion.

The network data currently shows that Terraform Labs' collapse in May 2022 is what led to the collapse of FTX. It implies that the source of "Contagion FTX" is linked to the "Contagion TerraUSD" center, which is another contagion. As a result, the PEG value is reduced to 1:1 with US dollars, wiping out 40,000 million US dollars over the course of a few days.

After TerraUSD's collapse, this contagion caused "Three Arrows Capital," one of the hedge funds, "Celsius," the crypto lending platform, and "Voyager Digital," the crypto broker, to file for bankruptcy in the next two months.

Even before Terra and FTX, there are other examples of the contagion in the crypto market.

A dark web marketplace called ‘Silk Road’ that was accessible through the Tor private browser was taken down by the FBI in 2013. Since using Bitcoin does not require exposing oneself like using fiat, it is used by buyers and sellers for illegal transactions. Ross Ulbricht, an American drug dealer and the founder of the Silk Road dark web marketplace, was also arrested.

The crypto data chart and Mosaic research company show that Silk Road was shut down before 'Sheep Marketplace,' another black market that steals 96,000 Bitcoin from customers. In addition, China’s central bank banned the institutions from processing Bitcoin. BitInstant CEO Charlie Shrem was also sentenced to prison for trading. In February 2014, 850,000 Bitcoin were taken from the cryptocurrency exchange "Mt. Gox," Tokyo’s website for trading digital currencies between 2010 and 2014.

In terms of dimension, Mt. Gox still has a large-scale cryptograhic space.

At the time of the hack, the exchange represented 70% of the total volume of Bitcoin trades. It began in 2010 and experienced a few hacks, with 80,000 Bitcoin being taken in 2011. However, the business abruptly shut down in 2014 after the company's 740,000 Bitcoin and the customer's 840,000 Bitcoin were stolen.

Leading up to the hack, the price of Bitcoin rose to an all-time high of 1,000 US dollars in November 2013, around the time that Ulbricht, the founder of Silk Road, was arrested. But two months after the Mt. Gox shutdown, the price of Bitcoin fell to 360 US dollars, having an impact on the entire market.

Together with Kraken, Bitstamp, Blockchain.info (later changed to Blockchain.com), Circle, and BTS China (later changed to Blockchain.com and changed its name to BTCC), Coinbase, the most recent cryptocurrency exchange at the time, released a joint statement denouncing "the tragic infringement of user trustworthiness.” They described the guidelines for ambiguous accounts, which have since appeared in the context of the FTX downfall, and stated that "being a custodian should have a high standard, as well as the appropriate security measure which requires regularly independent check and test, adequate balance sheet and reserve funds as a commercial authority, transparent and verifiable exposure of customer data, and the clear policy to not use the customer's assets for proprietary trade or for margin loan by leverage trading.”

Background of Contagion

Contagion is not a term defined by the crypto industry even though there are currently many trades in the "bear market," which is a situation where the stock index market and stock price continuously decline with low trading volume and adverse economic factors,

In a broad context of economics, “contagion” is the explanation of how the crisis starts in one institution, market, or region and then spreads to others. This phrase is repeatedly used to describe the cryptographic ecosystem in 2022. However, this is not where this word originates.

The term is derived from the medical branch of epidemiology, which focuses on the spread of diseases. For example, public health experts have stressed the importance of restraining the Covid-19 contagion, which started in 2020.

Economists first used the term "contagion" after the collapse of the Thai baht in July 1997, also known as the "1997 Asian financial crisis." East Asia, Russia, and South America were all affected by this incident.

In conclusion,

•         Contagion is the actual or perceived spread of the unpleasant situation in the crypto industry from one company to another.
•         The examples of contagion include the consequences of the FTX error and the failure of Silk Road.