Crumbling Crypto

Some of the risk-on bent we’ve seen in the stock market faded today. Perhaps that’s because mid-term elections failed to provide much clarity as too many races are too close to call. Perhaps it’s because the month-long rally has run its course. Perhaps it has to do more with Disney’s disappointing earnings announcement, Or maybe the imploding crypto market (see below). Currently, the Dow is down 360 points and the S&P 500 is down 1%. The VIX fear gauge picked up a bit, though gold is flat (and down nearly 7% this year). Safe-haven Treasury bonds are trading modestly higher, whereas junk corporates are giving back yesterday’s gain.

The crypto ecosystem is in the news today. Bitcoin, Ethereum and Coinbase (COIN) have fallen another 20+% over the last couple of days. The culprit seems to be a failing crypto exchange called FTX.com. (Strangely enough, you may have seen FTX advertised on MLB umpire uniforms 2021.) FTX is apparently on the brink of bankruptcy, and another crypto exchange called Binance quickly offered to take it over to “stem any further crypto contagion,” according to Bloomberg News. However, “just hours into their due diligence, Binance executives found themselves staring into a financial black hole…” Also, it doesn’t help that the SEC is investigating whether FTX improperly handled customer funds. So Binance is reportedly backing out of the deal.

Contagion is a very real risk in this space. For example, a Wedbush analyst published a report warning that lender Silvergate Capital (SI) may be financially exposed to FTX. The report says that “rumors have begun to emerge that Silvergate has a line of credit out to FTX, putting them at potential risk of credit exposure.” Silvergate’s stock is down over 28% in the last two days. This is where the wild west of speculation meets the reality of a broad bear market and slowing economy. Or as Warren Buffett has said, “only when the tide goes out do you discover who’s been swimming naked.” This can’t be the end of the bad news for crypto.

Disney (DIS) announced third quarter results that missed Wall Street expectations; the stock is down 12%. The theme park business, while interrupted by Hurricane Ian, doubled profits on higher attendance and in-park spending. But all eyes are on the Disney+ streaming service. And while the service added more new subscribers than expected (12.1 million), its losses doubled during the quarter. Thus we confirm the truth of Netflix CEO Reed Hastings’ comment last month that his competitors are losing money in streaming. While Disney owns an unparalleled stable of media content, creating a top-notch global streaming platform isn’t cheap or easy. Management says the service will be profitable beginning in 2024. In the meantime, it will raise prices, create an ad-supported low-cost subscription tier, and look for ways to cut costs.