The Crypto crash has the market all in bloody red. Bitcoin (BTC) drops deeper, marking its price below the $18,500 level. Ethereum (ETH), on the other hand, melts further below the $1,000 level.
While the market is cowering in fear, here's why experts aren't worried about the U.S. economy.
Experts Say Debt Market is Insulated From Crypto Influence
In a report published by CNBC, economists and bankers noted that the meltdown of the crypto market does not matter much in the list of issues that could potentially impact the U.S. economy.
Joshua Gans, an economist from the University of Toronto, said that the crypto market still remains a small portion of the economy.
Gans also adds that it is important to consider the relationship between cryptocurrencies and the broader debt market that composes a bigger parcel of the U.S. economy.
"People don't really use crypto as collateral for real-world debts. Without that, this is just a lot of paper losses," says Gans.
To put things in a clearer picture, CNBC reported that the cryptocurrency market's total capitalization, currently standing at around $800 billion, still remains a far cry from the U.S. housing market's $43 trillion total capitalizations.
Crypto Still Far From Making Significant Impact on the Real World
Gans further adds that exposure to crypto vis-a-vis the debt market remains low. He notes that most people who use crypto only collateralize them for a different cryptocurrency loan, but not to borrow cold cash.
"People have used cryptocurrency to borrow for other cryptocurrency, but that's sort of contained in the crypto world," says Gans.
Goldman Sachs said almost the same thing last May. According to them, only 0.3% of U.S. households have cryptocurrency holdings. They add that the impact of the crypto crash on aggregate spending is expected to be minimal.
Without much debt collateralized by cryptocurrency assets, the meltdown within the crypto market is not expected to reach considerably risky spillovers to the broader U.S. economy. A report from Morgan Stanley says that mostly crypto firms benefit from cryptocurrency loans.
Morgan Stanley adds that the weak relationship between the debt market and cryptocurrencies is also the same reason why the impact of the crypto crash may be limited to the crypto market alone.
Kevin O'Leary, a venture capitalist, further supports claims similar to Morgan Stanley's. According to O'Leary, institutional holdings for cryptocurrency are not sizable enough.
Experts Say U.S. Economy is What Affects Crypto
It must be noted that experts agree with each other that there have been more financial firms and investment funds offering exposure to cryptocurrency holdings over the recent months. However, Gans says, "there isn't much of that investment going on."
"I don't think we've seen the sort of exposure to that that we've seen in other financial crises," says Gans.
Instead, experts believe that the U.S. economy has a broader influence on the crypto market's nightmarish status quo.
According to a strategist from the Bank of America, "Higher than expected rate hikes coupled with recession risk has broadly hit risk assets including software and crypto/digital assets."
