Why the $2 trillion crypto market crash isn’t killing the economy

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The carnage in the cryptocurrency market will not stop as token prices drop, Corporate layoffs In waves, some of the most famous names in the industry go up to the belly. The chaos has terrified investors, wiping out more than $2 trillion of value in a matter of months — and wiping out the life savings of retailers who bet heavily on crypto projects billed as safe investments.

The sudden drop in wealth has raised fears that a cryptocurrency crash could help trigger a broader recession.

The market capitalization of the cryptocurrency market is less than a trillion dollars (which is less than half of the market capitalization apple‘s) small compared to the state Gross domestic product: $21 trillion Or $43 trillion for the housing market. But US households own a third of the global crypto market, Goldman Sachs estimates, The Pew Research Center survey They also discovered that 16% of adults in the United States said they had invested in, traded or used cryptocurrency. So there is a certain degree of national exposure to the sell-off in the cryptocurrency market.

Then there is the complete mystery about the emerging crypto sector. It may be among the smaller asset classes, but the bustling industry commands a lot of attention in popular culture, with advertisements for major sports leagues and stadium sponsorships.

However, economists and bankers tell CNBC that they are not worried about the detrimental effect of cryptocurrency on the broader US economy for one big reason: cryptocurrency is not tied to debt.

said Joshua Gans, an economist at the University of Toronto.

Gans says that this is a big part of the reason why the cryptocurrency market is still a “sideshow” to the economy.

No debt, no problem

The relationship between cryptocurrency and debt is key.

For most traditional asset classes, their value is expected to remain fairly stable over a certain period of time. This is why those assets owned can be used as collateral to borrow money.

“What you don’t see with crypto assets, simply because of their volatility, is the same process that you can use to buy other assets in the real world or more traditional financial assets and borrow on that basis,” Gans explained. .

“People have used cryptocurrencies to borrow other cryptocurrencies, but that is kind of the case in the crypto world.”

There are exceptions – MicroStrategy Receives $205 Million Bitcoin-Backed Loan March with crypto-focused Silvergate Bank — but mostly crypto-backed loans within an industry-specific echo chamber.

According to a recent research note from Morgan Stanley, crypto lenders have mostly been lending to cryptocurrency investors and companies. Thus, the indirect risks of lowering the price of cryptocurrencies to the broader US dollar banking system “may be limited.”

for every enthusiasm for Bitcoin And other cryptocurrencies, venture capital and celebrity investor Kevin O’Leary notes that most digital asset holdings are not institutionalized.

Gans agrees, telling CNBC he doubts the banks are too Everything that is exposed to the sale of cryptocurrency.

“There are certainly other banks and financial institutions that have expressed interest in cryptocurrency as an asset and as an asset that they might want their customers to be able to invest in as well, but in reality, there isn’t much of that investment,” Gans explained, noting that banks have their own set of regulations and their own need to make sure Make sure that things are suitable investments.

“I don’t think we’ve seen that kind of exposure to what we’ve seen in other financial crises,” he said.

Limited exposure

Experts tell CNBC that exposure to the daily mom and pop investors in the US isn’t that high. Although some retail traders have been battered by the extension of recent liquidations, the overall losses in the cryptocurrency market are small compared to the $150 trillion net worth of US households.

According to a note from Goldman Sachs in May, cryptocurrency holdings make up only 0.3% of a household’s value in the United States, compared to 33% held in stocks. The company expects the drag on overall spending from the recent price drops to be “extremely small”.

O’Leary, who said that 20% of his wallet is in cryptocurrencyalso indicates that these losses are scattered all over the world.

Great news about the cryptocurrency economy and even situations like bitcoin or raised, these are decentralized holdings. He said it’s not just about the US short-form investor. “If bitcoin drops another 20%, it won’t matter because it is all over the place.”

“It was just $880 billion before the correction, which is a big number,” O’Leary continued.

For comparison, BlackRock owns 10 trillion dollars In assets under management, the market value of the four most valuable tech companies – even after this year’s correction – is still more than $5 trillion.

If Bitcoin drops another 20%, it won’t matter because it’s all over the place

Kevin O’Leary

capital project

Some Wall Street analysts believe the fallout from failed crypto projects is a good thing for the industry in general — a kind of stress test to remove obvious business model flaws.

“The collapse of weaker business models such as TerraUSD and Luna is likely to be healthy for the long-term health of this sector,” said Alksh Shah, global cryptocurrency and digital asset analyst at Bank of America.

Shah says the weakness in the crypto and digital assets sector is part of a correction for broader risk assets. Rather than driving the economy lower, crypto prices are tracking a drop in tech stocks, both of which are subject to pressure from larger macroeconomic forces, including spiraling inflation and a seemingly endless succession of Fed rate hikes.

Shah continued, “The higher-than-expected hikes in interest rates coupled with the risks of a recession have caused significant damage to risk assets including software and digital/crypto assets. With central banks tightening globally, my strategists expect central banks to take in about $3 trillion of liquidity. of markets all over the world.

Matty Greenspan, CEO of cryptocurrency research and investment firm Quantum Economics, also blames Fed tightening.

“Central banks were very quick to print large amounts of money when it was not needed, which has led to excessive risk-taking and reckless buildup of leverage in the system. Now that they have withdrawn liquidity, the whole world is feeling the pinch.”