Why the $2 trillion crypto market crash won’t kill the economy

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The carnage in the crypto market will not stop, as token prices plummet, companies lay off employees in waves, and some of the most popular names in the industry go bankrupt. The chaos has spooked investors, wiping out more than $2 trillion in value in a matter of months — and wiping out the life savings of retail traders betting big on crypto projects touted as safe investments.

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

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

Then there’s all the mystique surrounding the nascent crypto industry. It may be among the smaller asset classes, but the buzzing industry is getting a lot of attention in popular culture, with ads about major sports leagues and stadium sponsorships.

That said, economists and bankers tell CNBC they aren’t worried about a ripple effect from crypto on the broader U.S. economy for one big reason: Crypto isn’t pegged to the debt.

“People don’t really use crypto as collateral for real-world debt. Without it, it’s just a lot of paper losses. So it’s at the bottom of 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 even 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 should remain moderately stable over a period of time. This is why these held assets can then be used as collateral to borrow money.

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

“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-backed loan in March with crypto-specialty bank Silvergate — but for the most part, crypto-backed loans exist in a specific echo chamber. to industry.

According to a recent research note from Morgan Stanley, crypto lenders have primarily lent to crypto investors and businesses. The risks of spillovers from falling crypto prices onto the broader US dollar fiat banking system “could therefore be limited.”

Despite all the excitement surrounding bitcoin and other cryptocurrencies, celebrity venture capitalist and investor Kevin O’Leary points out that most digital assets aren’t institutional.

Gans agrees, telling CNBC he doubts the banks are all exposed to the sale of crypto.

“There have certainly been banks and other financial institutions that have expressed interest in crypto as an asset and as an asset that they might want their customers to be able to invest in as well, but in reality, it there’s not a lot of that investment going on,” Gans explained, noting that banks have their own set of regulations and their own need to make sure things are proper investments.

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

Limited exposure

Experts tell CNBC that the exposure of mother and pop daily investors in the United States is not that high. Even though some retail traders have been battered by the recent round of liquidations, the overall losses in the crypto market are small compared to the $150 trillion net worth of US households.

According to a note from Goldman Sachs in May, crypto holdings represent only 0.3% of household value in the United States, compared to 33% linked to equities. The company expects the slowdown in overall spending resulting from recent price cuts “to be very small.”

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

“The good news about the crypto economy and even positions like Bitcoin or Ethereum are decentralized assets. It’s not just the US investor that’s exposed,” he said. “If bitcoin went down another 20%, it wouldn’t really matter because it’s spread everywhere.”

“And that’s only $880 billion before the correction, which is a big fat nothing,” O’Leary continued.

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

If bitcoin were down another 20%, it wouldn’t really matter because it’s spread everywhere

Kevin O’Leary

Capital risk

Some Wall Street analysts even think the fallout from failed crypto projects is good for the industry as a whole — a kind of stress test to weed out obvious flaws in the business model.

“The collapse of weaker business models such as 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 sector is part of the broader correction in risky assets. Rather than dragging down the economy, crypto prices are dragging down tech stocks as both succumb to pressure from larger macro forces, including spiraling inflation and a seemingly endless string of rate hikes. from the Fed.

“Higher-than-expected rate hikes coupled with recession risk have largely hit risky assets, including software and crypto/digital assets. With global central bank tightening, my strategy colleagues s ‘expect central banks to draw about $3 trillion in liquidity from global markets,’ Shah continued.

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

“Central banks were very quick to print tons of money when they weren’t needed, which led to excessive risk-taking and reckless build-up of leverage in the system. Now that they withdraw the cash, the whole world is feeling the effects.”

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