Leverage means contagion. Just look at crypto

<div id=""><img data-cy="StoryImage" alt="Illustration of hands reaching for a gold coin, cut into pieces like a pie." sizes="100vw" src="https://images.axios.com/UzkhWGOclmw1RgKW1lBeY79xfUE=/0x0:1920x1080/320x180/2022/11/23/1669223496519.jpg?w=320 320w, https://images.axios.com/UzkhWGOclmw1RgKW1lBeY79xfUE=/0x0:1920x1080/320x180/2022/11/23/1669223496519.jpg?w=320 320w, https://images.axios.com/X2ATYs1AQlykBlKreWUXYz-fRek=/0x0:1920x1080/640x360/2022/11/23/1669223496519.jpg?w=640 640w, https://images.axios.com/X2ATYs1AQlykBlKreWUXYz-fRek=/0x0:1920x1080/640x360/2022/11/23/1669223496519.jpg?w=640 640w, https://images.axios.com/qjgHBnIpNoDV3Lm6AuIwYfte9_A=/0x0:1920x1080/768x432/2022/11/23/1669223496519.jpg?w=768 768w, https://images.axios.com/qjgHBnIpNoDV3Lm6AuIwYfte9_A=/0x0:1920x1080/768x432/2022/11/23/1669223496519.jpg?w=768 768w, https://images.axios.com/UozRFKPwignFN-fT8n_6LJHdQrA=/0x0:1920x1080/1024x576/2022/11/23/1669223496519.jpg?w=1024 1024w, https://images.axios.com/UozRFKPwignFN-fT8n_6LJHdQrA=/0x0:1920x1080/1024x576/2022/11/23/1669223496519.jpg?w=1024 1024w, https://images.axios.com/QDlG99GGx2stYJqmcu4Ehp6M1Sc=/0x0:1920x1080/1366x768/2022/11/23/1669223496519.jpg?w=1366 1366w, https://images.axios.com/QDlG99GGx2stYJqmcu4Ehp6M1Sc=/0x0:1920x1080/1366x768/2022/11/23/1669223496519.jpg?w=1366 1366w, https://images.axios.com/L2-_6yXxnXbA0IwfOuRlnozJrlk=/0x0:1920x1080/1600x900/2022/11/23/1669223496519.jpg?w=1600 1600w, https://images.axios.com/L2-_6yXxnXbA0IwfOuRlnozJrlk=/0x0:1920x1080/1600x900/2022/11/23/1669223496519.jpg?w=1600 1600w, https://images.axios.com/RdPb0OjdJxmPAEvX-Gba2-d7DfI=/0x0:1920x1080/1920x1080/2022/11/23/1669223496519.jpg?w=1920 1920w, https://images.axios.com/RdPb0OjdJxmPAEvX-Gba2-d7DfI=/0x0:1920x1080/1920x1080/2022/11/23/1669223496519.jpg?w=1920 1920w" decoding="async" data-nimg="responsive" style="position:absolute;top:0;left:0;bottom:0;right:0;box-sizing:border-box;padding:0;border:none;margin:auto;display:block;width:0;height:0;min-width:100%;max-width:100%;min-height:100%;max-height:100%"/><figcaption class="pt-3 text-caption font-sans text-soft-black-shade">Illustration: Allie Carl/Axios</figcaption></div><div>The financialization of crypto made it weak to the <a target="_blank" class="gtmContentClick" data-vars-link-text="kind of contagion" data-vars-click-url="https://www.axios.com/2022/11/17/crypto-dominoes-ftx-collapse-winklevoss-gemini-blockfi" data-vars-content-id="2853d2dc-6da8-4d0d-b8a0-03ccd3ded955" data-vars-headline="Leverage means contagion — just look at crypto" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/11/17/crypto-dominoes-ftx-collapse-winklevoss-gemini-blockfi" rel="noopener">kind of contagion</a> we're now seeing. Why it issues: The massive change in crypto between 2018 and right this moment is the introduction of large-scale lending to the sector. And with lending comes a brand new form of threat — counterparty threat — that crypto nonetheless hasn't discovered a great way of coping with.The massive image: Crypto is notoriously cyclical — the value of bitcoin plunged 70% in 2011, 83% in 2013, and 84% in 2018. These drawdowns have been all comparatively innocent, nevertheless, compared to the leverage-induced carnage being wrought through the present crypto winter.<ul><li>A part of that's simply because the amount of cash at stake was a lot smaller again then. However one other massive a part of it's that crypto wasn't actually financialized then — there was nearly zero lending, shorting, and the like. </li></ul>The way it works: On the coronary heart of the crypto undertaking is a technological feat: The power to create digital objects that exist solely in a single place and cannot be copied. If I ship you a bitcoin, I am unable to ship that very same bitcoin to another person. <ul><li>Because of this, if I personal a bitcoin, that bitcoin can go down in worth, and even be stolen, however these losses are mine alone. </li></ul>State of play: Crypto lending modifications the dynamic. Corporations like Celsius Community and FTX — each now in chapter — paid curiosity on crypto deposits, and lent out crypto belongings to debtors. <ul><li>As an alternative of 1 particular person proudly owning a easy asset of 1 coin, a depositor is owed a coin by the alternate. The borrower owns the coin, and the alternate is owed cash from the borrower whereas additionally owing cash to the depositor. </li><li>Successfully, an asset of 1 coin has change into an asset of 1 coin (within the fingers of the borrower) plus two liabilities of 1 coin (on the borrower and the alternate) plus two receivables of 1 coin (on the alternate and the depositor). </li><li>There at the moment are three belongings value 1 bitcoin. If the precise coin is misplaced and the borrower defaults, then the borrower and the alternate, and probably even the depositor can all find yourself dropping 1 bitcoin. </li></ul>What's occurring: Crypto losses have rippled throughout firms that engaged in such borrowing and lending exercise, from Luna to three Arrows Capital to Celsius to Voyager Digital to Alameda Analysis to FTX to Genesis to Gemini. None of them adequately managed their counterparty threat — the chance that the buying and selling venue you are coping with will go bust and never have the ability to pay you what you are owed.<ul><li>In conventional finance, central banks can step in to forestall such contagion. In crypto, nevertheless, there are not any such macroprudential overseers. </li></ul>💭 Our thought bubble, through Axios' Kate Marino: Levering crypto is probably the most human factor ever. Any time one thing’s created for a useful monetary goal — like inventory, bonds, oil contracts, homes, you title it — there'll at all times be individuals who engineer derivations of these issues purely to earn cash.The underside line: Maybe the leverage, and the following contagion, was inevitable and foreordained. </div>