Will the collapse in crypto market trigger a bigger economic catastrophe? Many fear it might.

Collapse in crypto market might trigger a bigger economic catastrophe

Concerns about increasing prices and poor economic conditions are causing investors to abandon cryptocurrencies at a time when stock markets have plunged from coronavirus pandemic highs. 

According to Coin Metrics, the price of bitcoin fell to $25,401.29 the week before last.

It's the first time the cryptocurrency has dropped below $26,000 since December 26, 2020.  Part of a bigger cryptocurrency sell-off that saw the whole market lose more than $200 billion in a single day.

According to Goldman Sachs, at the beginning of 2022, roughly $2.6 trillion of gold was kept as investments. The market cap was around $10 trillion. 

Prices for goods and services in the United States rose 8.3 percent in April, above experts' expectations, approaching the highest level in 40 years. 

The decline of the troubled stablecoin network Terra is also on traders' minds. The TerraUSD, or UST, is designed to reflect the dollar's worth. Although the week before last, its value dropped below 30 cents, prompting investors to lose trust in the so-called decentralised financial system.

Crypto may have an emotional impact that outweighs its worth, especially when other assets, such as equities, decline in value.

The crypto crash, which resulted in a nearly $2 trillion loss in value, harkens back to the financial crisis that happened in 2007 in some of the more mainstream stock and bond markets. 

According to Joshua Gans, an economist at the University of Toronto, most banks and other financial institutions have limited exposure to cryptocurrency price volatility.

He further expressed that Crypto can't be considered a collateral as of yet. Gans also doesn't think that one of these banks is going to bet on their crypto departments.

According to experts who talked with NBC News, there are no signs of the crypto market plunge affecting the broader economy just yet.

He further stated that even if a bank has taken too much risk regarding crypto, it is manageable. 

According to a Pew Research Center poll, cryptocurrency trading is popular mostly among men aged 18 to 29. 43% of them said they had invested in, a cryptocurrency.

Mati Greenspan, CEO of Quantum Economics stated that the entire DeFi market is based on the concept of a stablecoin keeping a peg against the USD.

Many things could be at risk depending on how the stablecoins perform in the coming days, said Greenspan. 

The crypto exchange Coinbase's stock is plummeting, and the business is telling depositors that their funds would not be secured if the crypto exchange goes bankrupt, something CEO Brian Armstrong claims is unlikely. 

In August 2021, job postings with phrases like "crypto" or "blockchain" climbed by 615 percent, according to LinkedIn statistics.

Anecdotes of high losses won't surprise Gans, but he doesn't anticipate them to be common or cause global economic disruption.

If individuals have been withdrawing money from their savings or if hedge firms have been doing something wild, it may be camouflaged, Gans said.

However, he did issue some words of caution about certain unknown variables. 

According to Chainalysis, the number of users actively buying and trading nonfungible tokens, or NFTs, has dropped by more than half this year, after taking off last year as a method to invest in digital art and collectibles.

Have a confidential story, tip, or comment you'd like to share?
Contact chantelle@thefinancestory.com in the first instance.

Sign up for The Finance Story Fortnightly newsletter

Inspiration, Learnings, Knowledge in your in-box

Get stories delivered to your inbox

Subscribe to our weekly newsletter
By subscribing, you agree to our Terms of Use & Privacy Policy.
Learning Learning Partner Partner
Which Dell Technologies offerings do you wish to know more about?

Book 1:1 call with industry expert