Why the collapse of the crypto market for 2 trillion dollars will not kill the economy

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The carnage of the crypto market will not weaken as symbol prices fall, companies lay off employees of waves and some of the most popular names in the industry walk on your stomach. The chaos has scared investors by wiping out more than $ 2 trillion in a few months – and destroying the savings of retailers who rely heavily on cryptocurrencies charged as safe investments.

The sudden decline in wealth has raised fears that the crypto crash could help trigger a wider recession.

The market capitalization of the crypto market is less than $ 1 trillion (which is less than half of Apple‘s) is small compared to the country $ 21 trillion GDP or $ 43 trillion housing market. But U.S. households own a third of the global crypto market, according to estimates by Goldman Sachs. and a Pew Research Center study also found that 16% of adults in the United States say they have invested, traded or used cryptocurrency. So there is some degree of national exposure to deep sales in the crypto market.

Then there is all the mystique surrounding the nascent crypto sector. It may be among the smaller asset classes, but the booming industry is attracting a lot of attention in popular culture, with advertisements for major sports championships and stadium sponsorships.

However, economists and bankers told CNBC that they were not worried about the effect of crypto on the wider US economy for one big reason: crypto is not debt-bound.

“People don’t really use cryptocurrency as collateral for real-world debt. Without it, these are just a lot of losses on paper. So this is low on the list of problems for the economy, “said Joshua Hans, an economist at the University of Toronto.

Hans says this is a big part of why the crypto market is still more of a “side show” for the economy.

No debt, no problem

The relationship between cryptocurrencies and debt is key.

For most traditional asset classes, their value is expected to remain moderately stable over time. Therefore, these held assets can be used as collateral for borrowing money.

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

“People have used cryptocurrency to borrow for another cryptocurrency, but that’s in the crypto world.

There are exceptions – MicroStrategy took out a $ 205 million loan secured by bitcoins in March with the crypto-focused bank Silvergate – but for the most part, crypto-secured loans exist within an industry-specific echo chamber.

According to a recent research note by Morgan Stanley, crypto lenders have lent mostly to crypto investors and companies. Therefore, the risks of cryptocurrency prices spilling over to the wider US dollar banking system “may be limited”.

For all the enthusiasm for bitcoin and other cryptocurrencies, venture capitalist and renowned investor Kevin O’Leary points out that most digital asset holdings are not institutional.

Hans agrees, telling CNBC that he doubts the banks are everything that is on display at the crypto sale.

“Certainly there have been banks and other financial institutions that have shown interest in crypto as an asset and as an asset in which they would like their customers to be able to invest as well, but in reality not so much of that investment continues,” Hans said. Noting that banks have their own set of regulations and their own need to make sure things are the right investments.

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

Limited exposure

Experts tell CNBC that the exposure of everyday mothers and pop investors in the United States is not so high. Although some retailers have been battered by the recent liquidation period, the total losses in the crypto market are small compared to the net worth of US households of $ 150 trillion.

According to a note from Goldman Sachs in May, crypto holdings account for only 0.3% of the value of US households, compared to 33% of equity. The firm expects aggregate cost resistance from the recent drop in prices to be “very little”.

O’Leary, who said that 20% of his portfolio is in cryptocurrencyalso emphasizes that these losses are spread around the world.

“Great news for the crypto economy and even positions like bitcoin or etherium, these are decentralized farms. It is not only the American investor who has been revealed, he said. If bitcoin falls another 20%, it won’t matter because it’s widespread.

“And that’s only $ 880 billion before the correction, which is a big worthless burger,” O’Leary continued.

By comparison, BlackRock has $ 10 trillion in assets under management, and the market value of the four most valuable technology companies – even after this year’s adjustment – is still over $ 5 trillion.

If bitcoin falls another 20%, it won’t matter because it’s widespread

Kevin O’Leary

Risk capitalist

Some Wall Street analysts even believe that the consequences of failed crypto projects are good for the industry as a whole – a kind of stress test to wash away the obvious shortcomings of the business model.

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

Shah says the weakness in the crypto and digital assets sector is part of a broader adjustment of risky assets. Instead of shrinking the economy, cryptocurrency prices are following lower technology stocks as both succumb to pressure from larger macroeconomic forces, including spiraling inflation and a seemingly endless series of Fed rate hikes.

“Higher-than-expected interest rates, combined with a risk of recession, have largely affected risky assets, including software and crypto / digital assets. “With global central banks, my strategy colleagues expect central banks to take about $ 3 trillion in liquidity from global markets,” Shah continued.

Mattie Greenspan, chief executive of crypto research and investment firm Quantum Economics, also blames the Fed’s tightening.

“Central banks were very quick to print piles of money when they were not needed, which led to excessive risk-taking and reckless accumulation of leverage in the system. Now that they are drawing liquidity, the whole world is feeling the pinch.”

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