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

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

According to economists and bankers, the overall U.S. economy will not be negatively impacted by the crypto sell-off.

Cryptocurrency isn’t actually used by people to secure repayment of real-world debts. Without it, all of this is simply a waste of paper. Accordingly, this is not a major concern for the economy, according to economist Joshua Gans of the University of Toronto.

The destruction in the cryptocurrency market won’t stop as token values fall, businesses fire workers in waves, and some of the most well-known brands in the sector fail. Investors have been scared off by the instability, which has erased more than $2 trillion in value in a few of months and destroyed the life savings of individual traders who placed large bets on cryptocurrency ventures marketed as secure investments.

The quick decline in wealth has increased worries that the crypto meltdown may contribute to starting a larger recession.

In comparison to the nation’s $21 trillion GDP or $43 trillion housing market, the sub $1 trillion market valuation of the cryptocurrency industry (less than half that of Apple) is negligible. Goldman Sachs believes that American households control one-third of the world’s cryptocurrency market, while a Pew Research Center poll indicated that 16% of American people have bought, sold, or utilized a cryptocurrency. Therefore, there is some level of national exposure to the cryptocurrency market’s sharp sell-off.

Then there is the whole mystery around the developing crypto industry. Despite being one of the more niche asset classes, the burgeoning business attracts a lot of media attention because to sponsorship deals for stadiums and advertisements during big sports events.

However, for one key reason—crypto being unrelated to debt—economists and bankers said that they aren’t concerned about a ripple effect from cryptocurrency to the larger U.S. economy.

Cryptocurrency isn’t actually used by people to secure repayment of real-world debts. Without it, all of this is simply a waste of paper. Accordingly, this is not a major concern for the economy, according to economist Joshua Gans of the University of Toronto.

The crypto market is still more of a “side show” for the economy, according to Gans, in large part because of this.

No Debt, No Problem

It’s important to understand how debt and cryptocurrency are related.

It is anticipated that the value of the majority of conventional asset types would be steady over time. Because of this, the possessed assets may be pledged as security against a loan.

Because of their volatility, crypto assets haven’t yet shown the same ability to be used to purchase other real-world assets or more conventional financial assets and then be used as collateral for loans, according to Gans.

“People have borrowed other cryptocurrencies for their own, but that’s kind of restricted in the crypto world,”

There are few outliers, such as the $205 million bitcoin-backed loan MicroStrategy obtained from the cryptocurrency-focused bank Silvergate in March, but for the most part, loans secured by cryptocurrencies are confined to a single sector.

Recent data from Morgan Stanley indicates that the majority of the loans made by crypto lenders have gone to investors and businesses. Therefore, “may be modest” dangers of spillover from falling crypto values to the larger fiat U.S. dollar financial sector.

Despite the excitement around bitcoin and other cryptocurrencies, venture capitalist and well-known investor Kevin O’Leary notes that the majority of holdings in digital assets are not held by institutions.

Gans concurs, said that he does not believe banks are too vulnerable to the sell-off in cryptocurrencies.

“There have definitely been banks and other financial institutions that have expressed interest in crypto as an asset and as an asset that they might also like their customers to be able to invest in,” said Gans, noting that banks have their own set of regulations and their own need to ensure that things are appropriate investments. However, not much of that investment is actually happening.

He said that there had not been the same level of exposure to it as in previous financial crises.

Limited Exposure

According to experts, American mom and pop investors don’t have a particularly high level of exposure. Although the latest wave of liquidations has hurt some retail traders, total losses in the cryptocurrency market are negligible in comparison to the $150 trillion net worth of U.S. households.

Goldman Sachs said in May that just 0.3 percent of household wealth in the U.S. is invested in cryptocurrencies, compared to 33 percent in stocks. The company predicts that the recent price decreases would have “a very minimal” impact on overall expenditure.

O’Leary emphasizes that these losses are dispersed globally and that he has said that 20% of his portfolio is in cryptocurrency.

“The good news about the cryptocurrency industry is that decentralized assets like bitcoin and ethereum exist. Not merely the American investment was revealed, he continued. “Bitcoin is everywhere, so it wouldn’t really matter if the price dropped another 20%.”

O’Leary said, “And it’s just $880 billion before the correction, which is a gigantic nothing burger.

In contrast, BlackRock manages $10 trillion worth of assets, and even after this year’s drop, the market capitalization of the top four tech firms is still over $5 trillion.

It wouldn’t matter much if the price of bitcoin dropped by another 20% because it is widely used.

Some Wall Street analysts even think the repercussions from failing cryptocurrency initiatives would be beneficial for the industry as a whole, acting as a stress test to flush out any glaring weaknesses in the business model.

According to Alkesh Shah, a global crypto and digital asset analyst at Bank of America, the demise of weaker business models like TerraUSD and Luna is probably good for the long-term health of this industry.

According to Shah, the decline in the market for cryptocurrencies and digital assets is a result of a wider correction in risk assets. Cryptocurrency prices are really falling along with tech shares, not slowing the economy, as both submit to pressure from stronger macroeconomic factors like soaring inflation and an incessant cycle of Fed rate rises.

“Risk assets, such as software and crypto/digital assets, have been hammered generally by higher than anticipated rate rises combined with recession risk. My strategy colleagues anticipate that when central banks throughout the world tighten, they will withdraw around $3 trillion in liquidity from global markets, Shah added.

The Fed’s tightening is also to blame, according to Mati Greenspan, CEO of the cryptocurrency research and investing business Quantum Economics.

“Central banks were ready to create large amounts of money when it wasn’t necessary, which encouraged excessive risk-taking and careless leverage accumulation in the system. The whole globe is feeling the squeeze now that they are removing the liquidity.

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