I didn’t want to put this in “future of Bitcoin” post because I wanted to have some discussion to try to understand how big of an impact of a crypto crash can be.
I understand that this might never happen & crypto market will keep growing and that would be great for everyone involved. So if you are in BTC to 1 M USD camp, this post is not for you.
BUT -: what if the crypto market crash like Subprime market did in 2008. What impact would it have on traditional assets -: Stocks , Bonds, Real estate ?
Let’s say for argument sake that there is a crash of 75% in BTC for whatever reason. This means the market cap would be wiped from 2 Trillion to 500 billion. Would this have any impact on other assets or not?
During subprime crash, the global financial markets came to halt. I am just trying to understand if crypto markets are so big to have any impact on credit and financial industry or crypto can be considered small and hence can be assumed isolated.
As far as I understand , sub prime crisis led to credit crisis which brought rest of the economy to standstill. I am thinking that most of leverage involved in crypto might not be mainstream and hence banks wouldn’t need to write off bad loans etc.
My layman view is that the risk of contagion (irrelevant of it coming from Bitcoin or something else) comes from the balance sheets of institutions, very big or multiple corporations and/or States.
The risk is particularly big in the financial sector with fractional reserves, where flash melting down of balance sheets and/or heavy withdrawals can endanger the institution. That, in turn, can freeze assets corporations need to function and put them in danger. To counter that, we have central banks, who have been battle trained in 2008 and seem to have learned that lesson very, very well (to the point that one could wonder if we’re not taking other kinds of risks by over protecting market participants and the economy, but that is off-topic).
A few years ago, I would have said that the risk of contagion was near 0.
Nowadays, we have traditional brokers who deal with cryptos, some of which also have banking activities. We have crypto ETFs and now derivatives on those.
I would say central banks are well equiped to deal with a crash coming from crypto for the time being. Especially so since loss of faith in cryptos would enhance faith in fiat currencies and sovereign bonds, which are where their interventions are most efficient.
At a personal level, I try to avoid exposure to brokers/banks who deal with cryptos. I would especially want the bank I use for everyday operations to not primarily have investing activities and especially not with cryptos as I’m sure if something happens, people will mostly be made whole regarding their securities (no idea for their crypto assets) but said assets could be frozen in the shorter term.
To put things in perspective, I was sure the Chinese debt crisis would have had heavy worldwide consequences as of now. It seems financial actors are pretty resilient and segregation of activities and assets and mitigation of the risk of being too exposed to a specific asset are being taken seriously. The system, as a whole, seems to be resilient.
In my view, as long as Bitcoin is not correlated with an underlying or real asset, its impact should remain close to zero. However, it could be significant for people using leverage, although this likely applies to a minority. For instance, it is unlikely that someone would have a mortgage in BTC. The real risk would be losing a tangible asset in exchange for « something purely speculative » or regarded as a store of value.
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