Illustration: Allie Carl/Axios
The financialization of crypto made it vulnerable to the kind of contagion we're now seeing.
Why it matters: The big change in crypto between 2018 and today is the introduction of large-scale lending to the sector. And with lending comes a new kind of risk — counterparty risk — that crypto still hasn't found a good way of dealing with.
The big picture: Crypto is notoriously cyclical — the price of bitcoin plunged 70% in 2011, 83% in 2013, and 84% in 2018. Those drawdowns were all relatively harmless, however, in comparison to the leverage-induced carnage being wrought during the current crypto winter.
How it works: At the heart of the crypto project is a technological feat: The ability to create digital objects that exist only in one place and can't be copied. If I send you a bitcoin, I can't send that same bitcoin to someone else.
State of play: Crypto lending changes the dynamic. Companies like Celsius Network and FTX — both now in bankruptcy — paid interest on crypto deposits, and lent out crypto assets to borrowers.
What's happening: Crypto losses have rippled across companies that engaged in such borrowing and lending activity, from Luna to 3 Arrows Capital to Celsius to Voyager Digital to Alameda Research to FTX to Genesis to Gemini. None of them adequately managed their counterparty risk — the risk that the trading venue you're dealing with will go bust and not be able to pay you what you're owed.
💭 Our thought bubble, via Axios' Kate Marino: Levering crypto is the most human thing ever. Any time something’s created for a functional financial purpose — like stock, bonds, oil contracts, houses, you name it — there will always be people who engineer derivations of those things purely to make money.
The bottom line: Perhaps the leverage, and the subsequent contagion, was inevitable and foreordained.

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