Token prices plummeted, companies in the industry laid off workers, and some well-known companies went bankrupt. In recent months, the market value of virtual currencies has evaporated by more than $2 trillion, and many investors have lost their life savings in the slump. However, despite this, the violent fluctuations in the currency circle do not seem to hurt the economy.
The total market value of virtual currencies is reduced by 70%
According to CoinGecko data, in November 2021, the total market value of virtual currencies exceeded $3 trillion. After months of adjustment, the current total market value of virtual currencies is only $912.1 billion, a decrease of nearly 70%.
Compared to the U.S. GDP of $21 trillion, or the total housing market value of $43 trillion, the current virtual currency’s market capitalization of less than $1 trillion (less than half of Apple’s market value) is insignificant. By comparison, BlackRock has $10 trillion in assets under management, and the market capitalization of the four most valuable tech companies — even after this year’s adjustment — is more than $5 trillion.
But U.S. households own a third of the world’s virtual currencies, according to Goldman estimates. A Pew Research Center survey also found that 16 percent of U.S. adults said they had invested, traded or used virtual currencies. Therefore, the deep sell-off in the virtual currency market has exposed risks in the United States to a certain extent.
Still, economists and bankers told U.S. media they were not concerned about virtual currencies having knock-on effects on the broader U.S. economy. For one reason, virtual currency has nothing to do with debt.
“People don’t really use virtual currency as collateral for real-world debt,” said Joshua Gans, an economist at the University of Toronto. “Without collateralization, a virtual currency crash is just a massive paper loss. So it’s an economic Ranked very low on the list of issues.”
No Debt, No Problem
The relationship between virtual currency and debt is the most critical.
For most traditional asset classes, its value is expected to remain moderately stable over time. This is why these own assets can be used as collateral for borrowing.
Joshua Gans explained: “We’ve only seen volatility in virtual currency assets. In real life, it’s not yet possible to use virtual currency assets to buy other real-world assets or more traditional financial assets and borrow and lend on that basis. One virtual currency is used to borrow another virtual currency, but this transaction exists only in the virtual currency world.”
There are exceptions: MicroStrategy in March provided a $205 million bitcoin-backed loan to Silvergate, a bank focused on virtual currency assets. But for the most part, virtual currency-backed loans exist within specific industries.
According to a recent research report by Morgan Stanley, virtual currency asset lenders primarily lend to virtual currency investors and companies. As such, the spillover risk to the broader U.S. dollar banking system from a virtual currency price collapse “may be limited.” Despite the enthusiasm for Bitcoin and other virtual currencies, venture capitalist and celebrity investor Kevin O’Leary noted that most digital asset holdings are not institutional investors.
This is echoed by Joshua Gans, who is skeptical that banks will be affected by the crypto sell-off.
He explained: “Of course, there are also banks and other financial institutions that have expressed interest in virtual currency as an asset and an asset that they want their customers to invest in too, but in reality, that investment is not that much. “Noting that banks have their own set of regulations and their own needs to make sure things are proper investments. I don’t think we’re seeing the kind of exposure that has been seen in other financial crises.”
Experts told the media that the risk exposure of the average American couple investors is not high. While some retail investors have been hit by a recent spate of liquidations, the overall losses in virtual currency markets are small relative to the $150 trillion in net worth of U.S. households.
According to a Goldman Sachs report in May, virtual currency assets account for only 0.3% of U.S. household assets, while stocks account for 33%. The bank expects a “very small” drag on total spending from recent price declines.
Kevin O’Leary said: “The good news about the virtual currency economy, even positions like bitcoin or ethereum, are decentralized holdings, which are not just for US investors alone. If bitcoin falls another 20 %, and that’s not a big deal, because Bitcoin holders are spread out.”
Some analysts on Wall Street have even argued that the fallout from the virtual currency project’s failure would be a good thing for the industry as a whole, a kind of stress test aimed at ironing out obvious business model flaws.
“The collapse of weaker business models like TerraUSD and Luna could be beneficial for the long-term health of the industry,” said Alkesh Shah, global virtual goods strategist at Bank of America.