The cryptocurrency meltdown is regularly described as a liquidity crisis by industry insiders and uncritical media outlets. The story goes something like this: a downturn in crypto markets, perhaps the result of negative trends in the broader economy, triggered a liquidity crisis that led to cascading bankruptcies across the industry.

By this telling, the trouble began back in May when the Terra (UST) stablecoin began to de-peg from the dollar as its sister cryptocurrency, Luna, crashed in value. The price of both cryptocurrencies fell to practically nothing within a few days, wiping out $US45 billion in market value. The immediate fallout resulted in a loss of value of $US300 billion across cryptocurrency markets within the week. (That figure has since grown to over $US2 trillion as prices have continued to slump.) Highly leveraged cryptocurrency investment firms suffered staggering losses. In June, Three Arrows Capital, a major crypto hedge fund that had borrowed heavily to leverage their own crypto investments, could not meet margin calls and was quickly forced into liquidation.

With so many loans going into default, crypto lenders started to go under as well. At the time of liquidation, Three Arrows Capital owed lenders $US3.5 billion, with little ability to repay. Voyager Digital, a major crypto lender, was left on the hook for $US370 million in Bitcoin and another $US350 million in USDC stablecoins that they had loaned Three Arrows. Celsius Network,…