Reports warn that large cryptocurrencies pose a systemic risk to global financial markets

Cryptocurrencies have become a topic of serious discussion over the past few years. But a new batch of reports warn that it could lead to a collapse in financial markets in the same way that the subprime mortgage crisis caused the Great Recession more than fifteen years ago.

Connecting larger digital assets like Bitcoin with traditional markets could create a ripple effect as consumers start taking out loans in larger amounts to finance risky cryptocurrency bets. Report from the Federal Reserve New York suggests. This process is called “leveraged trading,” which consists of the cryptocurrency owner trading with capital borrowed from a broker to enhance purchasing power.

These digital assets are not associated with any government controls or regulations, which may lead to significant price fluctuations and fluctuations. Many Americans have lost their savings playing in these markets in recent years, but most of these losses have been confined to niche areas in a largely unregulated sector of the economy.

“The use of leverage by crypto investors appears to be widespread, increasing investors’ exposure to shocks to crypto asset prices and the feedback loop between leverage and crypto asset prices,” the economists wrote in the report. They say that if enough people start investing in those companies, it could put significant pressure on household budgets, leading to higher delinquency rates.

New Bitcoin trading accounts surged 26% in the 10 days after President-elect Donald Trump won the election last month, The Washington Post reports. I mentioned In November. During his presidential campaign, Trump promised to become a major supporter of cryptocurrencies.

Trump repeat His plans earlier this week to create a strategic bitcoin reserve in the United States as the gold standard digital currency’s valuation surpassed $100,000. Analysts worry that going this route would effectively tie cryptocurrencies to the broader US economy at the expense of smaller cryptocurrency holders.

As of 2021, the top 10,000 Bitcoin investors owned a total of 5 million coins, the lion’s share of the total number of Bitcoins on the market, according to a study conducted by the National Bureau of Economic Research that year. “Participation in Bitcoin is still very biased towards a few large players even at the end of 2020,” said financial experts Igor Makarov and Antoinette Shor. He said in their report.

Another report from the Reserve Office, which reports to the Treasury Department, reached similar findings. ZIP codes with the highest levels of cryptocurrency holders have seen a rise in the number of households taking out more mortgage loans, Accordingly 26 November a report.

The increase in the use of crypto assets for other types of loans “could pose a risk to financial stability if there are spillover effects on the balance sheets of households or sectors of the real economy,” the researchers wrote in this report. Federal banking regulators should focus on low-income consumers with high debt and cryptocurrency holdings, the researchers added.

Reports warning of the possibility of wider contagion come on the heels of research showing heightened financial anxiety among younger generations.

Americans born between 1997 and 2012, known as Generation Zers, said they would need to make more than $587,000 a year to be financially successful. A new survey conducted by the financial services company Empowerment found. That’s nine times the average salary in the United States, according to the Social Security Administration.

The first cryptocurrency – Bitcoin – was mined during the Great Recession and was promoted as a decentralized money solution.

But since then, policymakers and financial analysts have rejected that claim.

“People don’t use it as a means of payment, or as a store of value,” Federal Reserve Chairman Jerome Powell said. He told CNBC recently. He added that cryptocurrencies are not an alternative to the US dollar as much as they are a “competitor to gold.”

Jamie Dimon, CEO of JPMorgan, has made similar comments in the past.

He called Bitcoin a “Ponzi scheme” in one conversation April interview with Bloomberg TVAdding that he always said, “It’s a scam.” Damon cited cybercriminals and drug gangs who prefer to use cryptocurrencies as a form of payment from their victims because there are no regulatory safeguards for customers.

People who own bitcoin and other forms of digital currencies don’t get their money back when a cryptocurrency exchange collapses in the same way that depositors in banks do.

Economists in the New York Fed report pointed to the 2023 case for the stablecoin Tether, a cryptoasset backed by the US dollar, as a problem point. They noted that it was backed by “risky assets, such as corporate bonds, precious metals, bitcoin, and collateralized loans,” making “Tether riskier than most major money market funds.”

Contagion in money market funds contributed to the 2008 collapse of investment bank Lehman Brothers.