The cryptocurrency market’s near-$2 trillion loss in value forces a difficult question: Could crypto trigger a broader economic slowdown?
It’s a concern that highlights the uncertainty inherent in a market that by many measures is still in its infancy but is now mainstream enough to inspire multiple Super Bowl ads and attention from mainstream financial institutions. Last month, Fidelity Investments, the nation’s largest retirement plan provider, said it would allow people to put bitcoin in their 401(k) accounts, beginning this year.
The question also points to the financial crisis that started in 2007, when a drop in the housing market sent the US into a deep recession and briefly threatened the global financial system.
While there’s plenty of reason for pessimism around the crypto market and some of the more mainstream stock and bond markets, experts who spoke with NBC News aren’t yet seeing signs of contagion from the crypto dip that could infect the larger economy.
Joshua Gans, an economist at the University of Toronto, said he believed most banks and other financial institutions have a limited exposure to crypto price fluctuations, having only recently begun to dabble in it with new crypto-focused offices and in limited cases accepting digital tokens as collateral for loans.
“Cryptocurrency is not quite there as a collateralized thing,” Gans said. “Could one of these banks have done something extremely stupid? Sure, but it doesn’t look likely.”
“They all have their crypto divisions, but betting the bank on it? I really don’t think they have,” he said. Even if a bank has taken on too much crypto risk, he added, “One idiotic bank we can handle.”
At its peak in November, the entire crypto market was valued at $3.1 trillion, according to data from CoinGecko, a company that aggregates crypto data. On Monday, it was down to $1.3 trillion. The price of bitcoin has fallen by more than half from its high. The digital currency luna is now nearly worthless, and a related coin, TerraUSD, is on shaky ground. And tether, a token that’s become increasingly important to how cryptocurrencies trade because of its stable price, needed an urgent rescue last week to avoid the online equivalent of a bank run.
Crypto trading is most common among men aged 18 to 29, of whom 43 percent said they had invested in, traded or used a cryptocurrency, according to a Pew Research Center survey in September. Overall, 16 percent of US adults said they had.
The crypto market is still dwarfed by sectors such as the US housing market, which was worth $43.4 trillion last year, or 30 times crypto’s current market capitalization, according to the online real estate service Zillow. There was about $2.6 trillion worth of gold owned as investments as of the beginning of the year, according to Goldman Sachs, with the total market capitalization of gold estimated at around $10 trillion.
But cryptocurrency may have a psychological effect that’s outsized compared to its value, especially as the prices of other assets including stocks fall and as rising US interest rates put the brakes on the economy.
“It adds to the sense of pessimism and bearishness,” said Eli Noam, an economist at the Columbia Business School who has written about cryptocurrencies. “It’s another big piece of bearish news, and so people process it in their other business decisions — whether to hold on to stocks or consume or invest or whatever.”
Noam said that while the loss is sizable, it comes in assets that had clearly become inflated.
“It’s a trillion-dollar market loss, though much of it is a paper loss and much of it is a return to earth of a highly overvalued asset,” he said.
Crypto price swings are not a new phenomenon, but one difference from earlier crypto price swings is the emergence of new types of assets that are different even from bitcoin and ethereum, the two most valuable cryptocurrencies.
Nonfungible 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 declined by more than half this year, according to the analytics company Chainalysis.
And then there are “stablecoins,” which also saw a surge in popularity last year. Stablecoins are designed to have a consistent value, such as $1, to facilitate trades and serve 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 for ensuring that the value stays pegged to that denomination.
Mati Greenspan, CEO of Quantum Economics, a research and investment firm, said there was a lot at stake in how stablecoins perform in the coming days.
“The entire DeFi market is built on the precept that a stablecoin can maintain a peg against the dollar,” Greenspan said, referring to decentralized finance, or financial products using a distributed computer ledger known as a 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 drop in crypto prices. US job postings with terms such as “crypto” or “blockchain” were up 615 percent in August 2021 from a year earlier, according to data from LinkedIn. Now, the stock price of the crypto exchange Coinbase is tumbling, and the company is warning depositors that their assets wouldn’t be protected if the exchange ever declared bankruptcy, a possibility that CEO Brian Armstrong added was not a risk.
But frequent failures are hardly unusual for tech endeavors. The stablecoin Titanium crashed to zero last year, angering investors including billionaire Mark Cuban, and experts expressed worries about luna and TerraUSD weeks ago.
“A lot of other projects will go bust as well. That’s what happens,” Greenspan said. “We have to think about crypto projects in general as startups. This is all very new. And startups in general have something like a 95 percent fail rate.”
Gans said he won’t be surprised by anecdotes of extreme losses, but he doesn’t expect them to be widespread or to unsettle the global economy.
“It could be hidden, if people have been taking money out of their savings or if hedge funds have been doing something crazy,” he said.
But he did offer some words of caution that there are still some unknown variables.
“My guess is that it’s still contained as its own thing,” Gans said. “It would spill over into the real economy if a whole lot of people had been borrowing in order to do that, and it’s not always easy to see that when times are good and prices are up.”
George is Digismak’s reported cum editor with 13 years of experience in Journalism