Why the $2 Trillion Crypto Market Crash Won’t Affect the Economy

Why the $2 Trillion Crypto Market Crash Won't Affect the Economy

The recent tragic situation in the cryptocurrency market can be described as tragic! The collapse in the price of various tokens such as Bitcoin, followed by waves of layoffs by cryptocurrency companies, and even the announcement of bankruptcy by industry leaders — a series of turmoil that caused the cryptocurrency market to evaporate in a matter of months It has wiped out more than $2 trillion in value and wiped out the life savings of retail investors who once made all-or-nothing bets on crypto projects.

According to Coindesk’s quotation, Bitcoin, the cryptocurrency with the largest market value in the world, continued to “fall down” after falling below the $20,000 mark on Saturday. The lowest dropped to $17,601.

As of press time, Bitcoin has recovered some of its losses, rising 7.39% within the day to $20,370 per piece.

The sudden drop in this market has sparked fears that the collapse of cryptocurrencies could trigger a wider recession.

But University of Toronto economist Joshua Gans said, “People don’t really use cryptocurrencies as collateral for real-world debt. Without that, it’s just a massive paper loss. So that’s low on the list of economic problems. .”

That’s a big reason why the cryptocurrency market remains a “secondary show” for the economy, Gans said.

The crypto market’s market cap of less than $1 trillion is insignificant compared to the country’s $21 trillion GDP or $43 trillion real estate market. But U.S. households own a third of the global cryptocurrency market, according to Goldman Sachs estimates, and a Pew Research Center survey also found that 16 percent of U.S. adults say they invest, trade or use cryptocurrencies . As such, the U.S. has been somewhat affected by the deep sell-off in the cryptocurrency market.

In addition, the nascent field of crypto is full of mystery. It may belong to a smaller asset class, but this hot industry has gained a lot of attention in pop culture and is advertised in major sports championships and stadium sponsorships.

Still, economists and bankers say they’re not concerned about cryptocurrencies having a knock-on effect on the U.S. economy for one big reason: cryptocurrencies have nothing to do with debt.

The Impact is Limited to the Industry

The relationship between cryptocurrencies and debt is key. For most traditional asset classes, their value is expected to remain moderately stable over time. This is why these owned assets can be used as collateral to borrow money.

“What you don’t see in crypto assets is that just because of their volatility, you can use it to buy other real-world assets or more traditional financial assets and borrow against that,” Gans explained. Use cryptocurrencies to borrow for other cryptocurrencies.”

There are exceptions — MicroStrategy applied for a $205 million bitcoin-backed loan from crypto-focused bank Silvergate in March — but for the most part, crypto-backed loans exist in industry-specific peer-to-peer lending.

According to a recent research report by Morgan Stanley, cryptocurrency lenders mainly provide loans to cryptocurrency investors and companies. As such, spillover risks to the wider fiat banking system from falling cryptocurrency prices are “likely to be limited.”

Despite the enthusiasm for Bitcoin and other cryptocurrencies, venture capitalist and celebrity investor Kevin O’Leary noted that most digital asset holdings are not held by institutions.

Gans agrees, stating that he doubts banks are all affected by the cryptocurrency sell-off.

According to Gans, “Of course there are banks and other financial institutions that have expressed interest in cryptocurrencies as an asset, and they may want their customers to be able to invest in this asset as well, but in reality, there are not many such investments.” Point out that banks have their own set of regulations and have their own needs to make sure these things are the right investments.

“I don’t think we’ve seen the kind of exposure that has been seen in other financial crises,” Gans said.

Limited Risk Exposure

In the U.S., the average retail investor is not as exposed as that. While some retail traders have been hit by a recent spate of liquidations, the overall losses in the cryptocurrency market were small compared to the $150 trillion in net worth of U.S. households.

According to a report from Goldman Sachs in May this year, cryptocurrencies account for only 0.3% of U.S. household assets, while stocks account for 33%. The firm expects a “very small” drag on total spending from the recent drop in cryptocurrencies.

“Good news about the crypto economy, even positions like bitcoin or ethereum, which are decentralized holdings. It’s not just U.S. investors that are affected,” O’Leary said. A 20% drop is no big deal because it’s all over the place.”

“Before the correction, the Bitcoin market was only $880 billion, which is a big burger of insignificant,” O’Leary said.

By comparison, BlackRock has $10 trillion in assets under management, and the market capitalization of the four most valuable tech companies — even after adjusting for this year — is more than $5 trillion.

Some analysts on Wall Street even argue that the fallout from a crypto project’s failure is a good thing for the industry as a whole — a stress test to iron out obvious business model flaws.

“The collapse of weaker business models like TerraUSD and Luna could be positive for the long-term health of the industry,” said Alkesh Shah, global crypto and digital asset strategist at Bank of America.

The weakness in the crypto and digital asset space is part of a broader risk-asset correction, Shah said. Instead of driving the economy down, cryptocurrency prices followed tech stocks lower as they all succumbed to the pressure of larger macroeconomic forces, including spiraling inflation and the Federal Reserve’s seemingly endless stream of interest rate hikes.

“Higher-than-expected rate hikes combined with recession risks have hit risk assets broadly, including software stocks and crypto/digital assets,” said Shah. As central banks around the world tighten policy, BofA’s strategy colleagues expect central banks to About $3 trillion in liquidity will be recovered from global markets.”

Mati Greenspan, CEO of crypto research and investment firm Quantum Economy, also blamed the Fed for tightening. “Central banks are printing huge amounts of money very quickly when they don’t need it, which has led to excessive risk taking and a reckless build-up of leverage in the system. Now that they are withdrawing liquidity, the whole world is feeling the pressure.”

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