Looking For Contagion
Note: We are resending Friday’s crypto weekly to include some resources pertaining to unsecured creditors in the FTX bankruptcy case.
Mapping Possible Contagion
Recently, we have discussed the risk of further drawdowns from the fallout from FTX as the reason for not being too aggressive at these admittedly favorable long-term entry levels. In this week’s note, we wanted to further unpack a few areas of the market where contagion could be lurking.
Below is a fascinating graphic compiled by Bloomberg that maps SBF’s exposure throughout the crypto and traditional financial world. Many of the entities in the graphic below are simply investors in FTX that are now marking their holdings to zero.
We think that it is essential to distinguish between two types of contagion – (1) the kind that leads to the cordoning off of toxic assets and is usually coupled with a winddown of a fund or bankruptcy (i.e., BlockFi, Ikigai, Galois) and (2) the kind of contagion that leads to forced selling due to liquidations or liquidity issues.
The first type of contagion certainly compounds negative sentiment and often hurts market participants, but the effect on market prices is not all that significant. The second type is the kind that leads to cascading drawdowns in price and is what we are concerne...