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Home » Crypto crash could teach us to stop putting borrowed money in high-risk assets. But would it?
Cryptocurrency

Crypto crash could teach us to stop putting borrowed money in high-risk assets. But would it?

Kostiantyn TsentsuraBy Kostiantyn Tsentsura18.05.2022
Crypto crash and the traditional finance
Crypto crash and the traditional finance

The latest crypto crash was one of the biggest in history. And some experts predict it to affect the traditional economy.

For more than a week all world media are talking about the crypto market crash.

Some say this is ‘the end of crypto’, some say ‘the market would’ never restore. And some argue that now it’s the best time to buy Bitcoin, the only crypto to surely recover.

Let’s make some things clear. Yes, crypto prices plummet significantly since the beginning of the May. Yes, the Terra platform with its LUNA/UST tokens sucks.

No, not all stablecoins lost the dollar peg. And yes, this is not the first, nor last crypto market crash.

But now the question is: could the current crypto crash badly affect traditional finance?

Some experts say yes. But they also call ‘idiotic’ those, who put money in crypto.

Crypto crash inside the world economy

Even though last week crypto holders lost tens of billions of dollars, it’s like not the big money for traditional finance.

For instance, before the May collapse global crypto market capitalization was around $1,8 trillion. Now it’s slightly more than $1,2 trillion, so total crypto was devaluated approx to $600 billion.

The biggest crypto market cap was captured at $3 billion on November 10 last year. In comparison, only the U.S. housing market was worth nearly $43.4 trillion last year, according to the online real estate service Zillow.

It means that banks and traditional payment systems handle way more money than any crypto platform altogether. But, as we know, a lot of international banks started accepting crypto. Could they suffer the current crypto crash?

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.

“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. Even if a bank has taken on too much crypto risk, we can handle one idiotic bank”.

Financial fear of crypto

Another reason to worry about is that people could experience the psychological effects of a big crypto crash. Especially in the modern world, with developing economic crisis, the full-scale war in Ukraine, and a rather uncertain future.

So some experts think that mass panic, even within the comparatively small crypto market, can put the brakes on the economy.

“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,” said Eli Noam, an economist at the Columbia Business School.

Meanwhile, Joshua Gans believes that ‘it would spill over into the real economy if a whole lot of people will continue to put borrowed money in high-risk crypto assets’.

But wasn’t it clear before? Weren’t people told that they should buy digital assets only for some part of their savings? Doesn’t all the other investments work exactly like this?

Seems like some good old finance experts want to make scapegoats out of a crypto community because of the crap going on in the world economy. So if something bad happens to the world economy, crypto crash is there to blame.

But the reason is total crypto collapse would affect only this community. And the record inflation in US and China would affect the whole world.

Sources: NBS News, The Atlantic

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Kostiantyn Tsentsura
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Staff writer at cryptolife.report. Kostiantyn is a Ukrainian journalist who has been covering the science-tech industry for five years. Started his career by writing articles about crypto-mining in Ukraine. Has his own experience in trading some coins. Convinced blockchain adept who thinks that crypto community will save the future of the world economy.


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