Summary BlockFi, a provider of financial services to firms that had limited access to simple financial products, has declared bankruptcy, following its friend, FTX. The current crypto ecosystem may prove to be unstable and unsustainable in its current form. A large part of the earlier successes of the cryptocurrency system was created by the financial bubble, created in turn by the Federal Reserve System. Now, we are seeing in many places the weaknesses that exist in a "new" technological system that has been overly stimulated by excessive amounts of money to draw on. The concern: there will be more failures as the crypto world works to build itself out of the bubble it has been living in. It was coming. Now, the pace seems to be picking up. BlockFi, a firm involved in the crypto world, has gone under. This loss follows the closing of FTX. And, this all follows the falling of Three Arrows Capital, Voyager Digital, and Celsius Network. We read in the Financial Times , "The sheer interconnectedness of the crypto ecosystem suggests it is now inherently unstable for all participants." BlockFi has up to $10 billion in liabilities, which include customer accounts and settlement payments it owes the U.S. Securities and Exchange Commission. Furthermore, FTX rescued BlockFi in the spring when there was another round of crypto collapses. "BlockFi secured an emergency credit line of $400 million which also gave FTX a cheap option to buy BlockFi outright." Now, BlockFi is arguing that "it could simply reorganize in weeks and come out the other side revitalized." But, courts don't move that fast, and it is not altogether certain that the crypto asset world will be able to recover that rapidly if in any form like it exists now. The article concludes, "There is little reason to imagine that the crypto ecosystem can become sustainable in its current form." History BlockFi came to life in 2017 and was created to provide credit services to markets with limited access to simple financial products. It was once valued at $3.0 billion. Peter Thiel, a Libertarian and cryptocurrency supporter, has been a strong financial backer of BlockFi. Thiel reportedly held a 19 percent position in BlockFi. BlockFi really began to function as money flowed into the cryptocurrency world around 2019 and beyond as the Federal Reserve created an investment bubble that supported the rise of many markets for financial assets and allowed billions of dollars to flow into these speculative markets. But, as the "bubble" progressed, not all firms prospered. FTX, founded in 2019, was another "startup" that was founded in 2019 and participated in the financial well created by the Fed in the 2020 and 2021 period. FTX was at one time valued at $32 billion. And, as suggested above, there are many more startup and early-stage companies in the crypto world that were founded in this time period who owe most of their existence to the amount of money that was just floating around the U.S. economy looking for a place to make a lot of quick profit. The M2 money stock rose by about 25.0 percent in 2020. Never has so much money been injected into the U.S. economy in one year. Then in 2021, the M2 money stock rose by another 12.5 percent, again an event that has hardly ever happened. The price of bitcoin (BTC-USD) went from about $5,000 in March 2020 to around $67,500 in November 2021. Well, the crypto world boomed and many investors made a lot of money. But, then the Federal Reserve began to signal that it was going to tighten. Bitcoin hit its peak price around November 8, 2021. The Federal Reserve really began to tighten up on its monetary brakes in the middle of March 2022. The price of bitcoin plummeted. The price now...around $16,000. And, companies dealing heavily in the cryptocurrency world weakened along with bitcoin. And, companies dealing heavily in the cryptocurrency world failed. FTX failed. Now, BlockFi has failed. And, there will be more. As the Financial Times article stated, "[T]he crypto ecosystem suggests it is now inherently unstable for all participants." Where We Are Now News of more failures in the near future will not be a surprise. Keep your eyes open. The Federal Reserve is committed to continuing its monetary tightening well into the 2023s. The U.S. economy is in disequilibrium, and it is going to take some time to get out of the mess it is in. Plus, you have more and more new technologies pushing to get started and to create their own path to profits. What the crypto world is going through is not new. Most innovative cycles go through some kind of shaking-out period as they move on into the future. The cryptocurrency world hit the ground running, with an asset price bubble that was being created by the Federal Reserve System. The results, for a time, were spectacular. But, the good times must come to an end. And, that is what we are going through. The problem is that on the downside, the adjustments that must be made to an evolving technology tend to be even more painful than in a "more normal" adjustment time. That is what we face. The world, as I have stated before, is going to become digital. But, it has to go through the process to find out the best ways to advance. A world that is flooded with money is not going to find that way because of all the possibilities that exist. This is a time of radical uncertainty. We do not know what the next generation is going to look like. That is why we must continually keep our eyes open. In a world of radical uncertainty, we don't even know what some of the possible outcomes might be at this time.
