Crypto market crash could send shock waves across the financial system – National

On Tuesday, bitcoin briefly fell below $30,000 for the first time in 10 months, while the cryptocurrency in general has lost nearly $800 billion in market value in the past month, according to data site CoinMarketCap, as investors fear policy tightening. cash.

Compared to the Federal Reserve’s recent tightening cycle that began in 2016, crypto is a much larger market, which raises concerns about its link to the rest of the financial system.

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How big is the cryptocurrency market?

In November, the most popular cryptocurrency, bitcoin, hit an all-time high of more than $68,000, pushing the value of the crypto market to $3 trillion, according to CoinGecko. That figure was $1.51 trillion on Tuesday.

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Bitcoin accounts for nearly $600 billion of this value, followed by Ethereum, with a market capitalization of $285 billion.

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Although cryptocurrencies are enjoying tremendous growth, the market is still relatively young.

US stock markets, for example, are worth $49 trillion, while the Securities Industry and Financial Markets Association pegged the existing value of US fixed income markets at $52.9 trillion at the end of 2021.

Who owns and trades cryptocurrencies?

Cryptocurrency started as a retail phenomenon, but institutional interest from exchanges, companies, banks, hedge funds, and mutual funds is growing rapidly.

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While it is difficult to get data on the ratio of individual investors versus institutional investors in the crypto market, Coinbase, the world’s largest cryptocurrency exchange, said institutional and individual investors accounted for about 50% of the assets on its platform in the fourth quarter.

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Coinbase said its institutional clients traded $1.14 trillion in crypto in 2021, up from just $120 billion in 2020.

Most of the bitcoin and ethereum in circulation are held by a select few. An October report by the National Bureau of Economic Research (NBER) found that 10,000 bitcoin investors, both individuals and entities, control about a third of the bitcoin market, and 1,000 investors own nearly 3 million bitcoins.

Nearly 14% of Americans have invested in digital assets as of 2021, according to University of Chicago research.

Could a Cryptocurrency Crash Hurt the Financial System?

While the overall crypto market is relatively small, the US Federal Reserve, the Treasury and the International Financial Stability Board have identified stablecoins – digital tokens tied to the value of traditional assets – as a potential threat to financial stability.

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Stablecoins are mostly used to facilitate trading in other digital assets. They are backed by assets that could lose value or become illiquid in times of market stress, while the rules and disclosures surrounding these assets and investor redemption rights are ambiguous.

Regulators said that could leave stablecoins vulnerable to a loss of investor confidence, especially in times of market stress.

It happened on Monday, when TerraUSD, a major stablecoin, broke its peg to the dollar in a 1:1 ratio and fell to $0.67, according to CoinGecko. This move partially contributed to the fall of Bitcoin.

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Although TerraUSD maintains its peg to the dollar through an algorithm, the investor is working on stablecoins that maintain reserves in assets such as cash or commercial paper that can spill over into the traditional financial system, causing stress in the underlying asset classes, regulators say.

As the fortunes of companies tied to the performance of crypto assets increase and traditional financial institutions become more involved in the asset class, other risks are emerging, regulators say. In March, for example, the Acting Comptroller of the Currency warned that banks could be bogged down by crypto-derivatives and unprotected exposures to cryptocurrencies, given that they operate with little historical price data.

However, regulators in general are divided on the scale of the threat posed by the cryptocurrency crash to the financial system and the broader economy.

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