Narrator: Is the cryptocurrency crash a threat to the financial system?


A representation of the virtual currency can be seen in this picture taken on November 28, 2021. REUTERS/Dado Ruvic/Illustration/Files

WASHINGTON, May 11 (Reuters) – Bitcoin briefly fell below $30,000 for the first time in 10 months on Tuesday, and the cryptocurrency as a whole lost nearly $800 billion in market value last month to tighten tightening, according to data site CoinMarketCap. monetary policy.

Compared to the Fed’s last tightening cycle that began in 2016, cryptocurrencies are a much larger market, raising concerns about their interconnectivity with the rest of the financial system.

How big is the cryptocurrency market?

According to CoinGecko, in November, Bitcoin, the most popular cryptocurrency, hit more than $68,000, boosting the value of the cryptocurrency market to $3 trillion. That figure was $1.51 trillion on Tuesday.

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Bitcoin accounts for nearly $600 billion of its value, followed by Ethereum with a market cap of $285 billion.

Although cryptocurrencies have exploded, the market is still relatively small.

For example, the U.S. stock market is worth $49 trillion, while the Securities Industry and Financial Markets Association estimated the outstanding value of the U.S. bond market at $52.9 trillion at the end of 2021.

Who owns and trades cryptocurrencies?

Although cryptocurrency started as a retail phenomenon, institutional interest in exchanges, corporations, banks, hedge funds, and mutual funds is rapidly growing.

Although it is difficult to obtain data on the ratio of individual and institutional investors in the cryptocurrency market, Coinbase, the world’s largest cryptocurrency exchange, said institutional and individual investors each accounted for about 50% of platform assets in the fourth quarter.

Coinbase reported that institutional clients traded in cryptocurrencies from $120 billion in 2020 to $1.14 trillion in 2021.

Most of the Bitcoin and Ethereum in circulation are held by a select few. According to an October report by the National Bureau of Economic Research (NBER), 10,000 Bitcoin ​​investors, both individuals and corporations, control about a third of the bitcoin market, while 1,000 investors own about 3 million bitcoins. ​​It appears that you own the token.

According to a study by the University of Chicago, about 14% of Americans invested in digital assets by 2021.

Could a cryptocurrency crash harm the financial system?

Although the overall crypto market is relatively small, the U.S. Federal Reserve, the Treasury Department and the International Financial Stability Board have designated stablecoins (digital tokens pegged to the value of traditional assets) as a potential threat to financial stability.

Stablecoins are primarily used to facilitate the trading of other digital assets. They are backed by assets that can lose value or become illiquid during times of market stress, while the rules and disclosures surrounding those assets and investors’ redemption rights are ambiguous.

Regulators have said that stablecoins can be prone to losing investor confidence, especially in times of market stress. read more

This happened on Monday when the major stablecoin, TerraUSD, broke the 1:1 peg against the dollar and fell to $0.67, according to CoinGecko. The move contributed in part to Bitcoin’s decline. read more

While TerraUSD maintains its link with the dollar through an algorithm, investors can use stablecoins to maintain reserves of assets such as cash or commercial paper, which could flow into the traditional financial system and stress the underlying asset class, regulators say . read more

Regulators say other risks are emerging as more company wealth is tied to the performance of crypto assets and more traditional financial institutions tamper with asset classes. For example, in March, a currency audit agency warned that crypto derivatives and unhedged cryptocurrency exposure could put the bank at risk, given that banks rarely use historical price data.

Nonetheless, regulators are generally divided on the scale of the threat a cryptocurrency collapse poses to the financial system and the broader economy.

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Report of Hannah Lang in Washington; Edited by Michelle Price and Matthew Lewis

Our standards: Thomson Reuters Trust Principles.

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