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Cryptocurrency is a big threat to the world economies: US Senator

In contrast to the Fed's last tightening cycle, which began in 2016, the cryptocurrency market is spreading concerns about its rooted connection with the rest of the financial system.

12-May-2022 By: Simran Mishra
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Cryptocurrency is a big threat to the world economies: US Senator

Because of cryptocurrencies, the United States is experiencing internal strife; administrations are split into two slums: those who support cryptocurrencies and those who oppose them.

As the nightmare for crypto traders continues, the price of bitcoin has dropped below USD 33,000 for the very first time in ten months. According to the source, cryptocurrencies have lost an estimated USD 800 billion in market value, in the last month, as traders fear stricter monetary policy.

In contrast to the Fed's last tightening cycle, which began in 2016, the cryptocurrency market is spreading concerns about its rooted connection with the rest of the financial system.

HOW BROAD THE CRYPTOCURRENCY MARKET IS?

According to the source data, bitcoin, the most popular cryptocurrency, reached an all-time high of more than USD 68,000 in November, boosting the worth of the crypto market to USD 3 trillion. However, in the last 24 hours, that value has been hovering at USD 1.69 trillion.

Bitcoin accounts for approximately USD 600 billion of that total, with Ethereum coming in second with a market worth of USD 285 billion.

Securities Industry and Financial Markets Association claim that the US stock markets, for example, are valued at USD 49 trillion, while the outstanding value of US fixed income markets is USD 52.9 trillion as of the end of 2021.

WHO OWNS CRYPTOCURRENCIES AND TRADES THEM??

Although cryptocurrency emerged as a consumer trend, corporate interest from exchanges, enterprises, banks, hedge funds, and mutual funds is constantly developing.

Despite the data on the ratio of retail versus institutional investors in the crypto market being scarce, Coinbase, the world's largest cryptocurrency exchange, mentioned in the fourth quarter that retail and corporate investors each accounted for approximately half of the assets on its network.

Coinbase stated its institutional clients exchanged USD 1.14 trillion in cryptocurrency in 2021, up from USD 120 billion in 2020.

A small proportion of people own the majority of bitcoin and Ethereum in existence. According to a survey released in October by the National Bureau of Economic Research (NBER), 10,000 bitcoin traders, both individuals and businesses, command roughly one-third of the bitcoin market, and 1,000 traders own nearly 3 million bitcoin currencies.

According to the source data, nearly 14% of Americans had invested in digital assets as of 2021.

WOULD THE FINANCIAL SYSTEM BE AFFECTED BY A CRYPTO CRASH?

Stablecoins - digital currencies tied to the importance of traditional assets - have been considered as a possible concern to financial stability by the US Federal Reserve, Treasury Department, and the International Financial Stability Board.

Stablecoins are usually used to make trading in other virtual currencies more accessible. They are supported by assets that may degrade over time or become inaccessible in times of economic crisis, and the rules and regulations governing those assets, as well as investors' redeeming rights, are unclear.

Authorities have warned that this could result in a loss of investor confidence in stablecoins, especially during times of economic hardship.

According to the source data, this occurred on Monday, when TerraUSD, a prominent stablecoin, lost its 1:1 peg to the dollar and plunged as low as USD 0.67. This move contributed to bitcoin's downfall.

Investors running on stablecoins that retain holdings in assets such as cash or commercial paper might flow over into the traditional financial system, causing stress in those underpinning asset classes, according to authorities.

Other vulnerabilities are emerging, according to authorities, as more companies' fortunes are tied to the profitability of crypto assets and traditional financial institutions engage more in the asset class. Because banks are dealing with minimal historical pricing data, the Acting Comptroller of the Currency cautioned in March that crypto swaps and unleveraged crypto exposures could trip them up.

Nonetheless, regulators are polarized on the magnitude of the damage posed by a crypto meltdown to the financial system and the broader economy.



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