Why the crash of the $ 2 trillion crypto market will not kill the economy

The carnage in the crypto market will not let up, as token prices plummet, companies lay off employees in waves, and some of the most popular names in the industry go up. The chaos has scared investors, wiped out more than $ 2 trillion in value in a matter of months – and wiped out the life savings of retailers who invest heavily in crypto projects that are considered safe investments.

The sudden fall in wealth has created fears that cryptocurrency could help trigger a broader recession.

The crypto market’s market value of less than $ 1 trillion (which is less than half of Apple’s) is small compared to the country’s GDP of $ 21 trillion or the $ 43 trillion housing market. But U.S. households own a third of the global cryptocurrency market, according to estimates by Goldman Sachs, and a Pew Research Center survey also found that 16% of U.S. adults said they had invested in, traded or used a cryptocurrency. So there is a certain degree of national exposure to deep selling in the crypto market.

Then there is the whole mystery surrounding the nascent crypto sector. It may be among the smaller asset classes, but the busy industry gets a lot of attention in popular culture, with ads for major sports championships and stadium sponsorship.

That said, economists and bankers tell CNBC that they are not worried about a spillover effect from crypto to the broader US economy for one big reason: Crypto is not linked to debt.

“People do not really use crypto as collateral for real-world debt. Without it, this is just a lot of paper losses. So this is low on the list of problems for the economy,” said Joshua Gans, an economist at the University of Toronto.

Gans says that is a big part of why the crypto market is still more of a “sideshow” for the economy.

The relationship between cryptocurrencies and debt is key.

For most traditional asset classes, the value is expected to remain moderately stable over a period of time. This is why the owned assets can be used as collateral to borrow money.

“What you have not seen with cryptocurrencies, simply because of their volatility, is the same process that 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 lend to another cryptocurrency, but it’s kind of contained in the cryptocurrency world.”

There are exceptions – MicroStrategy took out a $ 205 million bitcoin-backed loan in March with the cryptocurrency-focused bank Silvergate – but for the most part, crypto-backed loans exist in an industry-specific echo chamber.

According to a recent research note from Morgan Stanley, crypto lenders have largely lent to crypto investors and companies. The gambling risk of transferring cryptocurrencies to the broader fiat banking system in US dollars may therefore be “limited.”

Despite all the enthusiasm for bitcoin and other cryptocurrencies, venture capitalist and celebrity investor Kevin O’Leary points out that most digital assets are not institutional.

Gans agrees, telling CNBC that he doubts the banks are everything that is exposed to crypto sales.

“There have certainly been banks and other financial institutions that have expressed interest in crypto as an asset and as an asset that they may want their customers to be able to invest in as well, but in reality not much of that investment is happening.” Gans explained, noting that banks have their own regulations and their own need to make sure things are appropriate investments.

“I do not think we have seen the kind of exposure to what we have seen in other financial crises,” he said.

Experts tell CNBC that the exposure of everyday mothers and pop investors in the United States is not that high. Although some retailers have been hit by recent liquidations, the total losses in the crypto market are small compared to US households’ net worth of $ 150 trillion.

According to a note from Goldman Sachs in May, cryptocurrencies make up only 0.3% of US households’ value, compared to 33% tied up in equities. The company expects that the burden on total expenses from the recent price declines will “be very small.”

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

“The good news is about the crypto-economy and even positions like bitcoin or ethereum, these are decentralized holdings. It’s not just the US investor who is exposed,” he said. “If bitcoin went down another 20%, it would not really matter because it is scattered everywhere.”

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

In comparison, BlackRock has $ 10 trillion in total assets, and the market value of the four most valuable technology companies – even after this year’s correction – is still over $ 5 trillion.

Some Wall Street analysts even believe that the fallout from failed crypto projects is a good thing for the sector in general – a kind of stress test to wash out the obvious flaws in the business model.

“The collapse of weaker business models such as TerraUSD and Luna is likely to be healthy for the long-term health of this sector,” said Alkesh Shah, global crypto- and digital asset strategist at Bank of America.

Shah says that the weakness in the crypto and digital asset sector is part of the broader correction of risk assets. Instead of driving the economy down, cryptocurrencies are tracking technology stocks lower, as both succumb to pressure from major macroeconomic forces, including spiral inflation and a seemingly endless series of Fed rate hikes.

“Higher-than-expected interest rate hikes combined with recession risk have largely affected risk assets including software and crypto / digital assets. With central banks globally tightened, my strategy colleagues expect central banks to take around $ 3 trillion of liquidity from markets globally,” Shah continued.

Mati Greenspan, CEO of the crypto-research and investment company Quantum Economics, also blames the Fed’s tightening.

“Central banks were very quick to print money when it was not needed, which led to excessive risk-taking and ruthless building of influence in the system. Now that they are withdrawing liquidity, the whole world feels squeezed.”