A year ago about 6,000 currencies were listed on CoinMarketCap. Now there are more than 11,000. If bitcoin crashed, that could puncture the entire crypto economy
THE RECENT expansion of the crypto-universe is a thing of wonder. Only a year ago there were about 6,000 currencies listed on CoinMarketCap, a website. Today there are 11,145. Their combined market capitalisation has exploded from $330bn to $1.6trn today—roughly equivalent to the nominal GDP of Canada. More than 100m unique digital wallets hold them, about three times the number in 2018.
A rout could be triggered either by shocks from within the system, say through a technical failure, or a big hack of a leading exchange. Or they could come from outside it: a clampdown by regulators, for instance, or an abrupt end to the “everything rally” in markets, say in response to central banks raising interest rates.
The result would be the destruction of a significant amount of wealth. Investors who have held bitcoin for longer than a year, having bought it at low prices, would have less to lose, despite large unrealised gains . The biggest losses would fall on those who bought less than a year ago, at an average price of $37,000. That would include most institutions exposed to crypto, including hedge funds, university endowments, mutual funds and some companies.
The rush to meet margin calls in cryptocurrency—the collateral of choice for leveraged derivatives—could force punters to dump conventional assets to free up cash. Granted, they might give up trying to meet those calls, since their crypto holdings would no longer be worth much, which could contain the sell-off. But other types of leverage exist, where regulated exchanges or even banks have lent dollars to investors who then bought bitcoin. Some have lent dollars against crypto collateral.
Issuers back their stablecoins with piles of assets, rather like money-market funds. But these are not solely, or even mainly, held in cash. Tether, for instance, says 50% of its assets were held in commercial paper, 12% in secured loans and 10% in corporate bonds, funds and precious metals at the end of March. A cryptocrash could lead to a run on stablecoins, forcing issuers to dump their assets to make redemptions.
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