Is the Crypto Crash a Threat to the Financial System?

Bitcoin dipped below $30,000 for the first time in 10 months. Overall, cryptocurrencies lost nearly $800 billion worth of market value in the previous month as investors remain worried about the stringent monetary policy. 

In November, the same bitcoin reached an all-time high of more than $68,000, elevating the crypto market value to $3 trillion. The same figure stood at $1.51 trillion on Tuesday. Bitcoin accounts for almost $600 billion of that market value, followed by ethereum, worth a $285 billion market cap.

The crypto market is still relatively small, even though it has attained explosive growth. Initially, cryptocurrency started as a retail phenomenon; however, institutional interest from companies, exchanges, hedge funds, mutual funds, and banks is growing fast.

According to the world’s largest cryptocurrency exchange, Coinbase, the retail and institutional investors each have accounted for around 50% of the assets on their platform in the fourth quarter. Their institutional clients traded about $1.14 trillion worth of crypto in 2021, increasing from $120 billion in 2020.

As per the National Bureau of Economic Research (NBER) October report, 10,000 bitcoin investors, both entities and individuals, manage around one-third of the bitcoin market, and about 1,000 investors own 3 million bitcoin tokens approximately.

In March, the Acting Comptroller of the Currency had warned that banks could stumble due to unhedged crypto exposures and crypto derivatives, as they are working based on little historical price data. Regulators remain divided regarding how threatful a crypto crash could be to the financial system.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in