ENCOURAGING ANGELS: Corrupt and Failing Cryptos Birth Bank Runs and Contagion in Advance of US Central Bank Digital Currency

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By Stan Szymanski

A little less than 2 months ago I wrote an article entitled ‘Genesis Trading: Give Us at Least $1 Billion or We are Looking at Bankruptcy ’. Genesis had $175 million tied up in a FTX trading account. Then the parent of Genesis, DCG, gave the company an infusion of $140 million. Consequently two weeks later Bloomberg reported:

…’Genesis has spent the past several days seeking at least $1 billion in fresh capital, said the people, who asked not to be identified because discussions are private. That included talks over a potential investment from crypto exchange Binance, they said, but funding so far has failed to materialize.’…

And this is all after …’The crypto firm’s lending arm, Genesis Global Capital, froze customer withdrawals in November, citing “unprecedented market dislocation” following the collapse of major crypto exchange FTX.’… (Reuters)

When a financial institution halts the ability of its customers to withdraw their assets it is either caused by malinvestment or a ‘run’ on the institution (think the Bedford Falls S & L in ‘It’s a Wonderful Life’).

Yesterday, Genesis laid off 30% of its staff and is reported to be considering bankruptcy.

Now, Silvergate Capital Corp, a leading cryptocurrency bank, has also fallen on its sword as reported during the last 48 hours:

…’The FTX collapse sparked a run on one of the crypto market’s top banks, Silvergate Capital Corp., forcing it to sell assets at a steep loss to cover some $8.1 billion in withdrawals

…’Crypto-related deposits plunged 68% in the fourth quarter, the bank said in an early release of some quarterly results. To satisfy the withdrawals, Silvergate liquidated debt it was holding on its balance sheet. The $718 million it lost selling the debt far exceeds the bank’s total profit since at least 2013.’…

A plunge of 68% in crypto related deposits would be safe to call a bank run.

On Thursday in a vote of no confidence, Fund Manager Kathy Wood of ARK Fintech Innovation ETF (ARKF.P) sold more than 400,000 shares of Silvergate. It’s always good to close the barn doors after the horses have bolted…(sarcasm off)

This type of blow to Silvergate will have profound repercussions and shock waves in the cryptocurrency markets and as we saw with Kathy Wood’s massive sale of her Silvergate shares, in the stock market as well. Silvergate has business ties to FTX, Coinbase, Paxos, Crypto.com, Gemini, Kracken, Bitstamp and Circle. IMHO, the potential ‘ripple’ effect in the capital markets looks exponential.

With all the hoopla about crypto in the past 10 years it is interesting to note that the actual success of it is actually limited and quite narrow.

According to ‘A Visual Analysis of 10 Years of Dead Crypto Coins’ by Ian Wright at CoinKickoff…’91% of coins established in 2014 eventually died due to low trade volume or abandonment’…

That mostly leaves one with the big names in the space that have survived such as: Bitcoin, Etherium, Litecoin and Tether. I have previously written that ‘Cryptocurrency Tether is Not a Stable ‘StableCoin’ and Will Collapse Crypto’. In doing my homework on the article you are reading, I found a gem of a supportive discourse.

In ‘Tether Manipulation Pushed Up Bitcoin’s Price, Researchers Find’(2018), ‘purchases with Tether are timed following market downturns and result in sizable increases in bitcoin prices’. So that means that there is ‘a clear link between the printing of new tether tokens and bitcoin’s price increases following bear runs’.

“By mapping the blockchains of bitcoin and tether, we are able to establish that entities associated with the Bitfinex exchange use tether to purchase bitcoin when prices are falling. Such price supporting activities are successful, as Bitcoin prices rise following the periods of intervention. These effects are present only after negative returns and periods following the printing of tether.”… and goes on to say …’the two (researchers) notably discovered that it does not take a large amount of tether to prop bitcoin’s price – “even less than 1 percent of extreme exchange of tether for bitcoin has substantial aggregate price effects,” the study said.’…’The algorithms the two developed were able to “cluster groups of related bitcoin wallets,” according to the study. This allowed the researchers to map how tether was distributed, and how it impacted bitcoin prices. The study explains that “tether is created, moved to Bitfinex, and then slowly moved out to other crypto-exchanges, mainly Poloniex and Bittrex.”…(Tether Manipulation Pushed Up Bitcoin’s Price, Researchers Find)

So according to this research work, much of the ‘resiliency’ and success of the biggest of Cryptocurrencies is due to manipulation of its coin price through the specific use of Tether as a trading pair (as opposed to some other ‘stable coin’ or cryptocurrency).

In my work, Cryptocurrency Tether is Not a Stable ‘StableCoin’ and Will Collapse Crypto, I detail the house of cards that, in my humble opinion, Tether is. If Tether is a house of cards and it is a known medium used to manipulate and support the price of Bitcoin as we see in Tether Manipulation Pushed Up Bitcoin’s Price, Researchers Find, then what can we surmise? When we see the collapses in Silverbank, Genesis Trading and FTX what hypothesis can we draw? In my estimation, the crypto marketplace is built on an erratic, capricious and precarious premise that a unit of account that cost them nothing to produce can be touted as a currency and all the while a small apparatchik of crypto exchanges and coin issuers have the ability to manipulate the markets. Deceit, hoax and graft do not for a stable market make. And an unstable market can lead to crisis.

How many traditional banks have exposure to this issue? Could this issue be what brought together FDIC regulators in November 2022 to discuss that the next time that financial institutions start to fail that there will not be a ‘bail out’ (financial assistance from the government) but a ‘bail-in’ (the taking of customer deposits to satisfy other creditors of the bank/institution)?

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Stan Szymanski (or Encouraging Angels) is not a medical doctor. This is not medical advice. In all matters pertaining to the health and care of a human being consult a medical doctor. This is not legal, financial or personal advice. Consult appropriate professionals in those fields for that type of advice.