Bitcoin bubble may have impacted markets after all
BEN KRITZ
ONE of the debates that arose during the “Bitcoin bubble” of December 2017-January 2018 was whether or not the inevitable crash would spread to other financial markets. The prevailing argument was that it wouldn’t. Cryptocurrency investors would suffer, some of them heavily, but since the market cap of cryptocurrency at its peak was still a small fraction of the regular financial markets, the damage would be limited.
A compelling hypothesis first raised at the beginning of the year and making the rounds of financial news sites again recently, however, suggests that Bitcoin’s spectacular fall from its highs near $20,000 at the end of 2017 to about $7,500 in early February 2018 may actually be responsible for the decline in world financial markets — particularly those in Asia — over roughly the same time period.
At its peak in early January this year, the total cryptocurrency market had a capitalization of about $850 billion, which was impressive considering the assets that made up the market were essentially based on imagination, but was still much less than other financial markets.
Germany’s DAX, for example, has a market cap of about $2 trillion; Hong Kong’s Hang Seng is about $4.5 trillion; the Shanghai Composite Index is about $5 trillion; the NASDAQ is about $10 trillion; and the NYSE, the mother of them all, has a market cap of about $23 trillion.
The hypothesis, however, asserts that it wasn’t the relative size of the cryptocurrency market at the time of the rapid inflation and subsequent crash, but its velocity. According to a couple of analyses from different sources, during the peak month of cryptocurrency trading activity — from mid-December 2017 to mid-January 2018 — a total of about $1.34 trillion in trade transaction were made. That put the cryptocurrency market on par with the biggest US markets in terms of trading activity. The average monthly trade on the NASDAQ is about $1.26 trillion, and the NYSE has an average monthly volume of about $1.45 trillion.
Because the cryptocurrency market expanded so rapidly, it’s a given that much of the trade during the peak period was done on margin. How much is impossible to determine — unlike the US and other major stock markets, data on margin accounts in the cryptocurrency markets are spotty — but it’s a reasonable assumption the level was similar to other markets, where active traders typically leverage their positions by four to 10 times. Thus when the cryptocurrency market lost about 63 percent of its value, about $500 billion, from its December peak to early February 2018, the amount of leveraged loss could have been between $2 trillion and $5 trillion.
Leveraged traders who got burned by the collapse in cryptocurrency prices would have had to sell other assets to make up the losses, and the hypothesis is that those assets were likely in other financial markets. Indeed, markets in places where cryptocurrency trading has been the heaviest all started to slide at about the same time. South Korea’s KOSPI and Japan’s Nikkei 225 lost about eight percent; the Shanghai Composite lost about 10 percent; and Hong Kong’s Hang Seng lost about 7.5 percent, all in the same period of about 10 days in early February.
European markets declined as well, as did other global markets (such as our own PSEi), although how much of that could be correlated to the cryptocurrency crash as opposed to tracking other markets is debatable.
As it is, the hypothesis leaves room for considerable doubt because it’s based more on a correlation — albeit a rather stark one — rather than clear evidence. But by the same token, there’s not really strong evidence to completely dismiss the idea, either.
With the exception of US markets, which have increasingly appeared to be an unaccountable outlier, other markets believed to have been affected have not recovered their pre-crypto collapse levels, while at the same time cryptocurrency prices have continued to trend downward.
The useful take-away from the “cryptocurrencies caused a global market downturn” hypothesis, however, is not that it might have happened, but that it describes a way in which it plausibly could happen. Regulators seem to be recognizing the threat of contagion, at least indirectly. The US Securities and Exchange Commission (SEC) has rejected applications for at least 10 Bitcoin or other cryptocurrency exchange-traded funds in recent weeks.
The SEC’s justification is that the proposed ETFs don’t offer sufficient safeguards against fraud and market manipulation, but whatever the reasoning, its action is so far also preventing another easy vehicle for leveraged trades in cryptocurrency.
Let’s hope it stays that way. The world and its markets have enough challenges without expanding the potential threat posed by the trade in imaginary fairy tokens, and the longer “cryptocurrencies as a tradable asset” remains a concept outside the mainstream, the more likely it’s effort will be redirected to finding other uses for its underlying blockchain technology.
ben.kritz@manilatimes.net
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