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

Francesco Carta Photographer | moment | Getty Images

The carnage in the crypto market is not going to end as token prices plummet, companies lay off employees in waves and some of the industry’s most popular names go bust. The chaos has scared off investors, erased more than $2 trillion in value in a matter of months – and wiped out the savings of retailers who bet heavily on crypto projects billed as safe investments.

The sudden drop in wealth has fueled fears that the crypto crash could help spark a wider recession.

The crypto market’s market cap of less than $1 trillion (which is less than half that of Apple) is small compared to the country’s GDP of $21 trillion or the $43 trillion housing market. But Goldman Sachs estimates that U.S. households own a third of the global crypto market, and a Pew Research Center survey also found that 16% of U.S. adults said they had invested in, traded, or used a cryptocurrency. So there is a degree of national exposure to the deep sell-off in the crypto market.

Then there’s the whole mystique surrounding the burgeoning crypto sector. It may be one of the smaller asset classes, but the bustling industry draws a lot of attention in popular culture, with advertisements about major sports championships and stadium sponsorship.

That said, economists and bankers tell CNBC they are not concerned about crypto’s knock-on effect on the broader US economy for one major reason: Crypto is not tied to debt.

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

Gans says that’s a big part of why the crypto market is still more of a “side show” to 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, those owned assets can then be used as collateral to borrow money.

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

“People have used cryptocurrency to borrow for other cryptocurrencies, but that’s kind of contained in the crypto world.”

There are exceptions — MicroStrategy took out a $205 million bitcoin loan from crypto-focused bank Silvergate in March — but for the most part, crypto-backed loans exist within an industry-specific echo chamber.

According to a recent research paper from Morgan Stanley, cryptocurrency lenders have mostly lent to crypto investors and corporations. The spillover risks of fueling crypto prices to the broader US dollar-denominated fiat banking system may therefore be “limited”.

Despite all the enthusiasm for bitcoin and other cryptocurrencies, venture capitalist and celebrity investor Kevin O’Leary points out that most digital asset ownership is not institutional.

Gans agrees, telling CNBC he doubts banks are all that exposed to the crypto sell-off.

“There have certainly been banks and other financial institutions that have expressed an interest in crypto as an asset and as an asset that they might want their customers to invest in as well, but in reality there isn’t that much of that investment going on,” explains Gans out, noting that banks have their own rules and their own need to make sure things are appropriate investments.

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

Limited exposure

Experts tell CNBC that the exposure of everyday mom and pop investors in the US isn’t that high. While some retailers have been battered by the recent series of liquidations, the total losses in the crypto market are small compared to the $150 trillion worth of US households.

According to a note from Goldman Sachs in May, crypto holdings represent just 0.3% of US household value, compared to 33% tied up in stocks. The company expects the drag on overall spending from the recent price cuts to be “very small.”

O’Leary, who has said that 20% of his portfolio is in crypto, also points out that these losses are spread globally.

“The great news about the crypto economy and even positions like bitcoin or ethereum, these are decentralized positions. It’s not just the US investor that’s exposed,” he said. “If bitcoin fell another 20%, it wouldn’t really matter because it’s scattered all over the place.”

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

By comparison, BlackRock has $10 trillion in assets under management, and the market value of the top four tech companies — even after this year’s correction — is still over $5 trillion.

If bitcoin fell another 20% it wouldn’t really matter because it’s spread all over the place

Kevin O’Leary

venture capitalist

In fact, some Wall Street analysts believe the fallout from failed crypto projects is a good thing for the industry at large — a sort of stress test to wash out the obvious flaws of the business model.

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

Shah says the weakness in the crypto and digital asset sectors is part of the broader correction of risk assets. Rather than pushing the economy down, crypto prices follow tech stocks lower as both succumb to pressure from larger macroeconomic forces, including rising inflation and a seemingly endless series of Fed rate hikes.

“Higher-than-expected rate hikes coupled with recessionary risk have hit major risks, including software and crypto/digital assets. As central banks tighten globally, my strategy colleagues expect central banks to take about $3 trillion in liquidity from markets worldwide,” continued Shah. .

Mati Greenspan, the CEO of crypto research and investment firm Quantum Economics, also blames the Fed tightening.

“Central banks were very quick to print blobs of money when they weren’t needed, leading to excessive risk-taking and reckless build-up of leverage in the system. Now that they’re withdrawing liquidity, the whole world is feeling it.”

Leave a Comment