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 nods to the financial crisis that started in 2007, when a drop in the housing market sent the U.S. 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 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 U.S. adults said they had.
The crypto market is still dwarfed by sectors such as the U.S. 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 U.S. 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.