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The Cryptocurrency Plunge has Sparked Worries of a Financial Meltdown

The near-$2 trillion decline in value of the cryptocurrency market raises a challenging question: Could crypto precipitate a larger economic slowdown?

It’s a worry that illustrates the unpredictability of a market that, although still in its infancy by many counts, has attracted the attention of major financial institutions and spawned many Super Bowl commercials. Fidelity Investments, the nation’s biggest retirement plan provider, said last month that, starting this year, customers would be able to deposit bitcoin into their 401(k) accounts.

The question also alluded to the financial crisis that began in 2007, when a decline in the housing market plunged the United States into a severe recession and jeopardized the global financial system for a short period.

While there are plenty of reasons to be pessimistic about the crypto market and some of the more conventional stock and bond markets, experts who talked with NBC News say they haven’t yet seen evidence of crypto contagion spreading to the bigger economy.

Most banks and other financial institutions, according to Joshua Gans, an economist at the University of Toronto, have limited exposure to crypto price fluctuations, having only recently begun to dabble in it with new crypto-focused offices and in some cases accepting digital tokens as collateral for loans.

“Cryptocurrency as a collateralized product isn’t quite there yet,” Gans added. “Could one of these banks have committed a heinous crime?” Sure, but it doesn’t seem to be a plausible scenario.”

“They all have crypto divisions, but is it worth risking the bank on?” “I don’t believe they have,” he said emphatically. “One dumb bank we can manage,” he continued, even if a bank has taken on too much crypto risk.

According to CoinGecko, a business that collects crypto data, the whole crypto market was valued at $3.1 trillion at its peak in November. It had dropped to $1.3 trillion on Monday. Bitcoin’s price has dropped by more than half since its peak. Luna, a digital money, is now practically worthless, and TerraUSD, a similar cryptocurrency, is also in trouble. Last week, tether, a stable-priced token that’s becoming more vital to how cryptocurrencies are traded, required an emergency rescue to prevent the online equivalent of a bank run.

According to a Pew Research Center poll from September, crypto trading is most popular among males aged 18 to 29, with 43% saying they had invested in, traded, or utilized a cryptocurrency. Overall, 16% of individuals in the United States claimed they had.

According to the online real estate firm Zillow, the crypto industry is still dwarfed by sectors like as the US housing market, which was worth $43.4 trillion last year, or 30 times crypto’s current market valuation. According to Goldman Sachs, around $2.6 trillion in gold was held as investments at the start of the year, with the overall market valuation of gold estimated at about $10 trillion.

However, bitcoin may have a psychological impact that outweighs its worth, particularly when the values of other assets, like as equities, decline and the economy is slowed by increasing interest rates in the United States.

“It contributes to the impression of gloom and bearishness,” Eli Noam, a Columbia Business School economist who has written about cryptocurrencies, said. “That’s yet another major piece of bad news, and people are processing it in their other business choices — whether to keep holding stocks, consume, invest, or whatever.”

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