How does the Crypto Crash Affect the Economy

How Does the Crypto Crash Affect the Economy

The crypto crash has been a popular topic to discuss recently. 2021 was an all-time high for crypto, which now seems like a distant memory. The popularity of cryptocurrency and blockchain technology has grown in recent years, and as a result, the market for these products has expanded. However, this expansion has been associated with the risk of investment bubbles bursting.

The Rise of the Crypto

The rapid rise of cryptocurrency in 2017 was a remarkable phenomenon for many people. The value of any cryptocurrencies surged, reaching all-time highs. For many people, this was a new way to make quick money.

However, this rapid increase resulted in severe issues. For instance, hacking, fraud, and frenzy buying were common issues. All of these issues contributed to the cryptocurrency market crash that happened in 2018. However, it is still unknown what would spark a fresh crypto bubble.

Crypto Crash

Investing in cryptocurrency was at its peak in 2021. It reached an all-time high of $69,000 in November 2021, and the Bitcoin’s overall market capitalization was over $3 trillion.

But things have changed in 2022. In January of 2022, cryptos fell below $2 trillion. It was all downhill, except for April’s minor uptick. In June, bitcoin markets reached a new low of 2022. The worldwide crypto market capitalization has dropped from $1 trillion to $977 billion. Since their all-time highs, bitcoin prices have dropped by 50% to 70%.

Other tokens, such as Avalanche, Dogecoin, and Solana, underwent even more significant losses. Some of these tokens lose up to 90% of their value. Nowadays, the overall market capitalization of cryptocurrency is around $860 billion.

Reasons for Crypto Crash

There are several reasons for the crypto crash.

Interest rates, inflation, and other macroeconomic conditions made people put their money in more safe alternative assets other than crypto. Savings accounts become more appealing as interest rates rise. It is because some people feel more comfortable keeping their money where they can earn predictable returns.

Moreover, the stock market and the cryptocurrency market are related. The cryptocurrency market is experiencing a similar downward trend as the stock market. The same forces that affect the stock market also impact the price of cryptocurrencies.

Another factor in the crypto crash is regulatory challenges. Cryptos have experienced a lot of downturns in 2022. The cryptocurrency market declined in January but recovered in February. The worldwide crypto industry has been under the observation of the world governments as they try to regulate cryptos.

How does the Crypto Crash Effects the Economy?

Crypto is a part of the investment industry. However, crypto is not the industrial or energy sector. Currently, the crypto market’s overall value is less than $1 trillion. It’s half of Apple’s market capitalization. The value of the American housing market is $43 trillion. Only 0.3% of household wealth in the United States is invested in cryptocurrency, while 33% is invested in stocks.

The crypto market is still relatively small compared to other sectors in the US, such as the equities and the housing market. However, cryptocurrency may have a more significant psychological impact than its monetary value, especially as the prices of other assets, such as stock falls and rising US interest rates halt the economy.

Besides, people don’t really use crypto as collateral in the real world debts. Thus, it would lower the risk to the economy. According to Joshua Gans, an economist at the University of Toronto, most banks and other financial institutions have limited exposure to crypto price fluctuations.

The economists and bankers are not too worried about the impact of the crypto crash on the broader economy. It is simply because of one reason: Crypto is not tied to debt.

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