Crypto assets $2.2 trillion drop has implications across the economy
In a softening investment environment, crypto assets perform far worse in comparison to conventional investments.
Crypto as an asset class are highly correlated with other risk assets but in a grossly exaggerated fashion. Since peaking in November 2021 at about US$3 trillion, a fall of about 52 per cent has resulted in the market capitalisation of all crypto assets dropping by $2.2 trillion.
Meanwhile, the tech-laden Nasdaq index peaked at just over 16,000 points in mid-November before falling to 11,737 this week, a fall of a relatively mild 27 per cent.
However, it’s not just crypto and stocks that have experienced declines. Other assets to drop in value have included the emerging markets’ currencies and securities, high-yield debt and the treasury bonds too.
According to the Federal Reserve Board, it is clear the main risk factor which began the sudden collapse in the crypto market in November 2021, is an increase in inflation.
This is unusual, given that cash flows don’t usually exist in crypto assets, therefore the drop in value may relate to the impact of the external settings on investor psychology and the increasing aversion to risk that has grown since late last year.
The “mainstreaming” of crypto last year attracted institutional money and wider use of sophisticated trading strategies, including the use of leverage and derivatives. It is now part of the broader economy, and therefore subject to the same behaviours as other asset classes.
The meltdown in cryptos is already producing casualties
Algorithmic stablecoin TerraUSD – which is supposed to use financial engineering to pin its value perfectly to the US dollar, fell below US$0.70 this week after experiencing something close to a “run.”
The dominant stablecoin, Tether, has so far held at below, $US1.
These declines across traditional crypto and stablecoins are impacting on the companies that facilitate the assets.
The largest US cryptocurrency exchange, Coinbase, was listed on the Nasdaq exchange last year. Its share price peaked at US$357 last November. Since the crypto market was booming last year it drew in investors. That increased demand pushed up prices and increased liquidity in the markets for the assets. It has now declined to around US$73.
This week it announced a loss of US$430 million.
All of this is a reminder that while crypto is an exciting asset class and drew a lot of attention, it remains volatile and, during the troughs, the more investment that has gone into the space, the greater the ramifications across the economy.