As Crypto Market Crashes, Some Fear Bigger Financial Crisis Will Follow

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The nearly $2 trillion loss in value in the cryptocurrency market poses a tough question: Could crypto trigger a broader economic downturn?

It’s a concern that underscores the uncertainty inherent in a market that, in many ways, is still in its infancy, but is now mainstream enough to inspire multiple Super Bowl ads and grab the attention of consumers. traditional financial institutions. Last month, Fidelity Investments, the nation’s largest retirement plan provider, said it would allow people to put bitcoins in their 401(k) accountsfrom this year.

The question also nods to the financial crisis that began in 2007, when a slump in the housing market plunged the United States into a deep recession and briefly threatened the global financial system.

While there are plenty of reasons for pessimism around the crypto market and some of the more mainstream stock and bond markets, experts who spoke with NBC News don’t yet see signs of contagion from the lower price. cryptography that could infect the economy as a whole.

Joshua Gans, an economist at the University of Toronto, said he thinks most banks and other financial institutions have little exposure to crypto price swings, having only recently started paying attention to it. new crypto-focused offices and in limited cases accepting digital tokens like guarantees for loans.

“Cryptocurrency isn’t quite there as a guaranteed thing,” Gans said. “Could any of these banks have done something extremely stupid? Sure, but that doesn’t seem likely.

“They all have their crypto divisions, but betting the bank on that? I really don’t think they did,” he said. Even if a bank took on too much crypto risk, he added, “A dumb bank we can handle.”

At his peak in Novemberthe entire crypto market was valued at $3.1 trillion, according to data from CoinGecko, a company that aggregates cryptographic data. By Monday, it had fallen to $1.3 trillion. Bitcoin price has fallen more than half from its peak. Luna digital currency is now almost without valueand a related coin, TerraUSD, is on unstable ground. And tether, a token that has become increasingly important how cryptocurrencies trade due to its stable price, need urgent rescue last week to avoid the online equivalent of a bank run.

Crypto trading is most common among men aged 18-29, with 43% saying they have invested in, traded or used cryptocurrency, according to a Pew Research Center survey in September. Overall, 16% of American adults said they had done so.

The crypto market is still overshadowed by sectors such as the US housing market, which was worth $43.4 trillion last year, or 30 times the current crypto market capitalization, according to online real estate service Zillow. There were approximately $2.6 trillion of gold held as an investment from the beginning of the year, according to Goldman Sachs, with the total gold market capitalization estimated at around $10 trillion.

But cryptocurrency can have a psychological effect out of proportion to its value, especially as the prices of other assets, including stocks, fall and rise in US interest rates put a damper on the economy.

“It adds to the feeling of pessimism and bearishness,” said Eli Noam, an economist at Columbia Business School who has written about cryptocurrencies. “This is another big bearish piece of news, and so people are factoring it into their other trading decisions – whether it’s to hold stocks, or consume or invest or whatever.”

Noam said while the loss is significant, it stems from assets that have clearly ballooned.

“That’s a trillion-dollar market loss, even though a lot of it is a loss on paper and a lot of it is a return to earth of a very overvalued asset,” he said.

Crypto price fluctuations are not a new phenomenon, but one difference from previous crypto price fluctuations is the emergence of new types of assets that are different even from bitcoin and ethereum, two most valuable cryptocurrencies.

Non-fungible tokens, or NFTs, took off last year as a way to invest in digital art and collectibles, but in a sharp reversal, the number of accounts actively buying and selling NFTs has more than halved this year, according to analytics firm Chainalysis.

And then there are “stablecoins”, which also saw a resurgence in popularity last year. Stablecoins are designed to have a constant value, such as $1, to facilitate transactions and act as a possible safe haven, and each stablecoin such as luna (which crashed) or tether (which briefly dipped below $1 last week) has a different, sometimes-elaborate process to ensure the value stays pegged to that denomination.

Mati Greenspan, CEO of Quantum Economics, a research and investment firm, said there is a lot at stake in the performance of stablecoins in the coming days.

“The entire DeFi market is built on the precept that a stablecoin can maintain a peg to the dollar,” Greenspan said, referring to decentralized finance, or financial products using a distributed computing ledger known as blockchain.

“That’s a lot of jobs, livelihoods, startups and projects that are suddenly in question,” he said.

Crypto hiring had been on a tear before the latest crypto price drop. According to LinkedIn data. Now the share price of the crypto exchange Coinbase is tumblingand the company warns depositors that their assets would not be protected if the exchange never declared bankruptcya possibility that CEO Brian Armstrong added was not a risk.

But frequent failures are not unusual for tech companies. Titanium stablecoin crashed last year, angering investors including Billionaire Mark Cubanand experts expressed concerns on luna and TerraUSD a few weeks ago.

“Many other projects will also fail. That’s what’s happening,” Greenspan said. “We have to think of crypto projects in general as startups. This is all very new. And startups in general have a 95% failure rate.”

Gans said he wouldn’t be surprised by stories of extreme losses, but he doesn’t expect them to be widespread or disrupt the global economy.

“It could be hidden, if people took money out of their savings or if hedge funds did something crazy,” he said.

But he cautioned that there are still unknown variables.

“I guess it’s still contained as its own thing,” Gans said. “It would ripple through the real economy if a lot of people borrowed to do this, and it’s not always easy to see that when times are good and prices are up.”

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