Cryptocurrency Warnings Cause Mortgage Crash in US and 2008 Financial Crisis

Cryptocurrency Warnings Cause Mortgage Crash in US and 2008 Financial Crisis

Regulators comparing the crypto-craze to mortgage bankruptcies in the US in the 2000s may seem like causing a panic, but the more crypto-currency integrates with investment and traditional markets, the more aware these warnings become.

The size of the cryptocurrency markets in relation to the world of financial assets is still small, but it is growing rapidly, much faster than the restrictions and controls imposed by the unregulated and rapidly developing industry.

Hardly a week goes by without a major bank or asset manager launching another crypto product or service. In recent days, Fidelity and BlackRock have launched blockchain, crypto, and metaverse exchange-traded funds, and Goldman Sachs has offered its first Bitcoin-backed loan facility.

Demands by policymakers to crack down on the “wild west” of cryptocurrency — to confront a range of risks from volatility to fraud, and cybercrime to contagion — are nothing new.

The Wall Street Journal reported Thursday that U.S. Senator Elizabeth Warren wrote to Fidelity’s CEO questioning the “appropriateness” of the company’s decision to add bitcoin to its 401(k) retirement plan options given the “significant risk of fraud, theft, and fraud for cryptocurrency loss.”

What is interesting is the set of recent references to the US sub-prime housing market, the unchecked expansion and collapse of which was the catalyst for the Great Financial Crisis of 2007-2009. They come amid mounting evidence that the bonds between Bitcoin and Wall Street have never been stronger.

In an April 4 speech on crypto, Securities and Exchange Commission Chairman Gary Gensler noted that several platforms ran prime-time television ads during the Super Bowl, as did mortgage lender AmeriQuest in the run-up to the GFC. He reminded his fans that AmeriQuest went bankrupt in 2007.

In an April 7 speech on digital assets, US Treasury Secretary Janet Yellen warned against repeating the mistakes of the 2000s that saw shadow banks and the proliferation of new financial products combined to fuel dangerous levels of risk.

On April 25, ECB Executive Board Member Fabio Panetta noted that the cryptocurrency today is larger than the $1.3 trillion US mortgage market, and said it shares “similar dynamics” with the market that ultimately brought the system to its knees. global finance. .

Can encryption really cause similar harm?

On the face of it, no. But the more traditional banks and finance get involved, the more opaque the relationships between the two worlds become, the more common investors are exposed to, and the risks suddenly become more systemic.

Alistair Sewell of Fitch Ratings Agency in London says the concern for regulators is “on the slope” and “the slope,” which is the point at which the average investor gets in and out of an investment in cryptocurrency.

This will likely include a bank, the link between traditional and digital finance. Sewell said that some digital homes may benefit from the capital markets, so investors are increasingly learning about the broader cryptocurrency ecosystem around them.

Bitcoin correlation

The global crypto world has grown nearly tenfold during 2020 and 2021, and is now around $2 trillion USD. This represents only 0.5 percent of global financial assets, but there are more than 17,000 different crypto-asset tokens in circulation.

The positive correlation between Bitcoin and Wall Street has never been stronger. This indicates that cryptocurrencies are not the preferred alternative investment for portfolio diversification or inflation hedges, but are as vulnerable as stocks in times of increased uncertainty and volatility.

In essence, cryptocurrencies are more volatile than traditional stock markets – they are smaller, less mature, and less liquid, and institutional investors play a much smaller role. But this is changing.

“As in the case of the US subprime mortgage crisis, a small amount of known exposure does not necessarily mean a small amount of risk, especially if there is a lack of transparency and insufficient regulatory coverage,” said the Basel-based Financial Stability Board. in February.

Bitcoin and the S&P 500 Index have been positively correlated on a daily basis every day since December 27. That’s over four months old, the longest uninterrupted stretch ever, and the strength of this connection recently is the highest ever.

The link between Bitcoin and the composite Nasdaq is tighter. They’ve been positively linked since November 26 last year, which is also the longest stretch ever, and the latter’s strength of that bond is unparalleled as well.

The degree of leverage in a system is also important in measuring systemic risk. Now, because the market is so opaque, that’s unknown. We now know, with 20/20 hindsight, that the leverage and cross-exposure of counterparties in secured and secured US mortgage housing has been extraordinarily high.

According to hedge fund industry data provider HFR, the crypto hedge fund world currently has nearly 100 funds totaling $55 billion in assets under management. Again, this is a tiny fraction of the $4 trillion hedge fund industry, but it’s highly leveraged and growing.

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2022-05-05 15:12:48

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