On October 16, 1907, stock market speculators F. Augustus Heinze and Charles W. Morse were trading on the curb.

At the time, the curb was the New York Stock Exchange.

Basically, it was hundreds of men yelling orders and conducting trades at Broad Street in lower Manhattan. It wasn’t until 1921 the NYSE moved inside.

Heinze and Morse were attempting to corner the stock of mining company United Copper.

But the trade failed. The two suffered huge losses. And they couldn’t pay back their loans… sparking the first worldwide financial crisis of the 20th century.

The banks associated with Heinze and Morse and their disastrous trade suffered runs on their deposits.

And while the banks were able to squash the runs, the problem spread to trust companies.

Trust companies were state-chartered intermediaries that competed with banks for deposits. But they weren’t a central part of the payments system. And as a result, they held a low percentage of cash reserves relative to deposits (around 5%).

Knickerbocker Trust, associated with Heinze and Morse and New York City’s third-largest trust, suffered an intense run and had to suspend operations.

That led to a full-scale financial crisis in New York that spread across the country and around the world.

There were numerous runs on banks and trust companies… Businesses throughout the country entered bankruptcy… And The NYSE fell almost 50% from its peak the previous year…

Overall, it made the public distrust the banking system. But it also served as an impetus for change.

The panic exposed problems in the system. And it led to the Federal Reserve Act of 1913 and the Federal Reserve System.

This, of course, is the panic of 1907… But it’s reminiscent of the crypto markets today.

Just like banking survived and became an even more integral part of the economy… The same will happen for crypto.

Of course, it certainly doesn’t feel like that now.

Life After FTX

FTX, one of the world’s largest crypto exchanges, announced on November 11 it had filed for Chapter 11 bankruptcy.

And it shocked the system akin to the panic of 1907.

Earlier this year, FTX was valued at $32 billion. And its founder and CEO, Sam Bankman-Fried, was estimated to have a $26 billion fortune.

That’s worth nothing now. Even worse, it’s estimated FTX owes $8.8 billion in liabilities.

On top of that, the speed of the collapse made it particularly shocking. It took just nine days to go from the initial report on Alameda Research’s balance sheet to bankruptcy.

And, of course, this isn’t our first collapse this year.

In May, crypto hedge fund Three Arrows Capital collapsed after the TerraUSD (UST) stablecoin de-pegged from the U.S. dollar… Three Arrows had $10 billion in assets and had to file for bankruptcy.

Others exposed, such as Celsius and Voyager, also filed for bankruptcy. And firms such as Galaxy Digital, Digital Currency Group, and Blockchain.com took losses.

The crypto industry’s already seeing spillover effects from FTX as well. Crypto lenders BlockFi, Salt Lending, and Genesis Global have halted operations.

And we’ll likely see more negative news in the weeks and months to come.

The impact of FTX can’t be underestimated… The incident makes crypto look like it’s still in its Wild West days – a black mark on an industry already down.

It’s likely some people will completely leave the space. Others watching from the sidelines may decide to stay there…

But it’s not going to kill crypto.

Just like the panic of 1907 didn’t kill banking, the FTX collapse won’t kill the cryptocurrency industry.

And as crazy as it sounds, it might do the opposite.

DeFi Is Benefiting From Centralized Greed

One area that’s already seeing activity is regulation. Several agencies are investigating FTX and Alameda. This will also likely accelerate regulation of the entire industry.

For example, we might see a proper regulatory framework for crypto exchanges established. And that wouldn’t be a bad thing.

We would see stronger oversight of reserves, audits, and risk controls. And that would certainly help investor confidence.

Of course, you’ll notice that we’re talking about centralized crypto enterprises.

Decentralized finance (DeFi) has operated just fine over this tumultuous year… Uniswap, Aave, and Maker keep on running as intended.

DeFi’s protocols are public, open, and more transparent. So it doesn’t require trust in the same way as its centralized counterparts.

Consequently, decentralized exchange (DEX) volume exploded to $32 billion in the week after the FTX collapse. That’s up roughly 150% from the week before.

According to reports, we’re also seeing BTC flow out of centralized exchanges – nearly $3 billion in the week after the FTX fallout.

On-chain figures suggest that many BTC owners have opted for non-custodial wallets.

That’s good news as well. The ability to self-custody your assets is a key tenet of cryptocurrency.

And let’s not forget the positive news that gets lost and forgotten in times like these.

  • Coinbase partnered with BlackRock, the largest asset manager in the world, with $10 trillion in assets under management. Coinbase will help provide access to crypto for BlackRock’s institutional clients.

  • Charles Schwab, Citadel Securities, and Fidelity announced their plans to start their own cryptocurrency exchange called EDX Markets.

  • Charles Schwab has roughly 33 million customers and $7 trillion in assets under management.

  • Citadel Securities is one of the largest market makers in the world and the largest market maker on the NYSE.

  • On top of that, Fidelity also announced it would soon offer crypto to its 40 million retail customers.

So yes, right now the situation feels bleak. But it’s important to keep perspective.

We shouldn’t confuse the ills of centralized crypto players like FTX and Alameda Research with the validity of blockchain.

The FTX collapse is like a forest fire. While devastating, a forest fire cleanses the forest and sets the stage for future growth.

Likewise, the FTX collapse will help cleanse the centralized crypto industry of its poor business practices and opaqueness.

It will be the impetus for a stronger, more mature crypto industry… And when the dust settles, I’m confident we’ll see bitcoin and crypto soar to new highs.

Now, you could get ahead of this shift and buy some bitcoin or Ethereum at their current prices… With both down more than 75% from their all-time highs, there’s plenty of room for profit.

But if you’re looking to take your crypto investments to the next level, Daily editor Teeka Tiwari is hosting an emergency briefing this Monday at 9 a.m. ET.

Everyone who attends will learn the secret behind Teeka’s biggest crypto gains (and how it relates to the current bear market)… as well as details on an opportunity Teeka believes could reshape your financial future for the better.

You can automatically RSVP for Teeka’s free event right here… But make sure you attend.

Teeka’s briefing is very time-sensitive and will close a few days after the event.



Greg Wilson
Analyst, Palm Beach Daily