Cryptocurrency value falls; Would it harm the financial system?

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May 14, 2022 | 7:00 am

On Tuesday, bitcoin briefly fell below $30,000 for the first time in 10 monthswhile cryptocurrencies in general have lost almost $800 billion in market value in the past month, according to data site CoinMarketCap, as investors worry about tightening monetary policy.

Compared to their size during the Fed’s last tightening cycle, which began in 2016, cryptocurrencies they are now a much larger market, which raises concerns about his interconnectivity with the rest of the financial system.

What is the cryptocurrency market worth?

In November, the most popular cryptocurrency, the bitcoinreached an all-time high of more than $68,000which brought the value of the cryptocurrency market to $3 trillion, according to CoinGecko, however that figure was $1.51 trillion on Tuesday.

Bitcoin represents almost $600 billion of that value, followed by ethereumwith a market capitalization of 285,000 million dollars.

Although cryptocurrencies have experienced explosive growth, the market is still relatively short.

The stock markets US bonds, for example, are worth $49 trillion ($49 billion), while the Securities and Financial Markets Industry Association has estimated the outstanding value of U.S. fixed-income markets at $52.9 trillion. dollars at the end of 2021.

Who owns and trades cryptocurrencies?

Cryptocurrencies began as a retail phenomenonbut institutional interest from stock exchanges, corporations, banks, hedge funds and mutual funds is growing rapidly.

Although data on the ratio of retail to institutional investors in the cryptocurrency market is hard to come by, coinbasethe world’s largest cryptocurrency exchange, said institutional and retail investors each accounted for around 50% of assets on its platform in the fourth quarter.

Its institutional clients traded 1.14 billion dollars in cryptocurrencies in 2021, up from just $120 billion in 2020, Coinbase said.

Most of the bitcoin and ethereum in circulation is in the hands of a select few.

A report from the National Bureau of Economic Research (NBER) that came out in October found that 10,000 investors in bitcoin, both people and entities, control about a third of the market and 1,000 investors own approximately 3 million bitcoin tokens.

Approximately the 14% of Americans had investments in digital assets until 2021, according to research from the University of Chicago.

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Would a fall in cryptocurrencies harm the financial system?

Although the global cryptocurrency market is relatively small, the United States Federal Reserve (fed), the Treasury Department and the International Financial Stability Board have pointed to stable cryptocurrencies – digital tokens pegged to the value of traditional assets – as a power threatl for financial stability.

Stable cryptocurrencies are mainly used for facilitate trade of other digital assets.

They are backed by assets that can lose value or become illiquid in times of market stress, while the rules and information surrounding those assets and investors’ redemption rights are confused.

Also, this can make stable cryptocurrencies likely to lose investor confidenceespecially in times of market stress, according to regulators.

That happened on Monday, when TerraUSDone of the main stable cryptocurrencies, broke his parity with the dollar and fell as low as $0.67, according to CoinGecko. That move contributed in part to the fall of bitcoin.

Although TerraUSD maintains its peg to the dollar through an algorithm, investor runs on stablecoins holding reserves in assets such as cash or commercial paper could spread to the financial system traditional, regulators say.

Regulators say that since the corporate fortune is tied to the performance of crypto assets and as traditional financial institutions are dipping deeper into this asset class, other risks are emerging.

In March, for example, the Comptroller of the Currency The interim warned that banks could stumble into unhedged crypto derivatives and crypto exposures as they work with little historical price data.

However, the regulators are divided in terms of the magnitude of the threat that a cryptocurrency crisis poses to the financial system and the economy in general.

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