The indicator from Planet Money: NPR

SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, “WAKING UP TO THE FIRE”)

WAILIN WONG, VERT:

This is the INDICATOR FROM THE PLANE MONEY. I’m Wailin Wong.

PADDY HIRSCH, VERT:

And I’m Paddy Hirsch. The crypto-verse – there are cryptocurrencies and all the financial technology associated with them – has had a tough time lately. The flagship’s crypto asset, bitcoin, has fallen sharply in value. The market value is down to about 390 billion dollars – about the same level as in December 2020.

WONG: It’s quite the opposite from October last year, when bitcoin had a market value of $ 1.14 trillion, and Matt Damon was on crypto.com.

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MATT DAMON: Fortune favors the brave.

HIRSCH: Fortune favors the brave. I love it. Thanks, Matt. Since that ad was sent, the total value of cryptocurrencies has dropped by two-thirds. That was $ 3 trillion. Now it’s 1 trillion – in fact less than that. I really, really, really want to call Matt Damon and ask him how brave he feels right now. But I do not have his number.

WONG: And he ignores all my lyrics. I dont know why.

HIRSCH: What? He’s a devil.

WONG: Most crypto investors are institutions, but many individuals have opted for crypto – some because they believe in the future of the blockchain and cryptocurrency, others because they have seen the gains many crypto companies have made, and they want to jump on that bandwagon.

HIRSCH: Yes. A survey by the Pew Research Center found that 16% of American adults said they had invested in, traded or used a cryptocurrency. There is a lot of exposure to one of the most risky assets known to mankind, and the recent collapse suggests that a lot of money is lost by many people. So we’ll be spending some time in the INDICATOR exploring the fallout from this collapse in a series of stories today and next week.

WONG: On today’s show, we look at the effect of the meltdown in crypto on the broader economy. A lot of money was lost, and many people in the cryptocurrency business are in pain. But what about those of us who have no exposure to crypto? And so are most of us. How much do we really need to care?

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HIRSCH: Recently, crypto investors have had an absolute nightmare – not to put too good a point on it.

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UNIDENTIFIED REPORTER # 1: Because we know there have been several days in a row of brutal sales for bitcoin …

UNIDENTIFIED REPORTER # 2: Bitcoin and other cryptocurrencies have taken a dive that …

UNIDENTIFIED REPORTER # 3: It was another cruel day for crypto. Digital currency …

WONG: And you can divide crypto investors into two groups. You have your institutions – there are mutual funds and venture capitalists and all that. And you have retail investors – people like you and me.

HIRSCH: Emma Rose Bienvenu is Chief of Staff at Pantera Capital. Panteras is a fund that invests exclusively in companies related to bitcoin and crypto. Here’s what she had to say about last week’s meltdown.

EMMA ROSE BIENVENU: I mean, obviously, you know, these – the beef markets are a lot more fun than the bear markets.

WONG: And we’re definitely in a bear market when it comes to crypto. A bear market is when a market index falls by 20% or more from the highest. Crypto-assets fell almost 70%. So it’s like a grizzly bear market. But Emma did not seem so confused about the fallout.

BIENVENU: This was not a failure in crypto or blockchain technology per se. It was the asset that reacted just like a risk, you know, very liquid assets would react to the market environment we are in due to high inflation and Fed austerity. A person who does not have exposure to crypto – which, I would encourage them – you know, it’s a great time to buy.

HIRSCH: A great time to buy, Wailin.

WONG: I think I’ll pass. I’m too scared.

HIRSCH: Not a failure. Regardless, Emma would not say whether Pantera has lost money, but she pointed out that like most investment firms, hers is set up to cope with, and possibly even profit from, these types of downturns. Now it’s not the same for individual investors – many of them have complained in news reports and on social media platforms like Reddit that they lost thousands of dollars.

WONG: And there are many individual investors in crypto. An annual Fed survey found that 12% of US adults used or kept crypto clean for investment in the past year. Now they probably did not lose all their money, but there are 31 million people. It will surely affect the economy in some way?

HIRSCH: Well, you would think so. But Jamie Cox probably does not say. He is the managing partner of Harris Financial Group in Richmond, Va.

JAMIE COX: This is not going to have the same detrimental effect that we saw with the housing market, you know, waves into banks and creates insolvencies and then leads to a potential – a global financial crisis that could easily have led to a global depression. That’s not where we are.

WONG: Jamie does not take the losses lightly, but he says that the broader economy is quite isolated from them. First, the amounts of money we are talking about are relatively small. The market value of the entire crypto market is less than $ 1 trillion.

HIRSCH: Yes. A trillion dollars may sound like a lot, but it’s actually less than half the market value of Apple or Amazon. So the risk of an individual fund’s loss on crypto waves through the market is quite low, says Jamie. And when it comes to losses for individual investors …

COX: The good news is that there is a lot of money in the system. People have jobs. They are not in danger of harming themselves permanently by making some bad financial choices that they would have made if this had been 2008.

HIRSCH: At that time, people borrowed a lot to buy houses they could not afford from banks that were willing to lend them the money, without question. When the market collapsed, many of these people lost everything. Banks collapsed, and the entire global economy almost collapsed.

WONG: But this time, people generally do not borrow large sums of money to invest in crypto. Perhaps more importantly, neither individuals nor companies use cryptocurrencies as collateral for loans.

HIRSCH: This is a big deal – right? – because when people or companies borrow money, they have to provide security, some security. It is a form of asset that the lender can take and sell if the borrower defaults. Like, if you borrow money to buy a house, then the house is the security. And if you are unable to pay the mortgage, the bank can take your home.

WONG: Companies use all sorts of things as collateral for the loans they borrow. But for the most part, no one is using cryptocurrencies right now. They are too risky, too volatile, too insecure. And that means that the corporate loan economy – as much as 22 trillion dollars of it – is not affected by what is happening in crypto countries.

HIRSCH: And lenders’ refusal to accept cryptocurrencies as collateral for loans is like this huge firewall between the cryptocurrency market and the wider US economy. This is not to say that crypto does not leak here and there. Jamie says that the stock market is a bit of a weak link because listed companies are increasingly starting to invest in crypto.

COX: There is a lot of ownership in cryptocurrency that did not exist a couple of years ago. The more notable are Tesla or MicroStrategy, but there are many others – insurance companies and the like – who have taken positions, albeit small in relation to the balance sheet, but who are trying to learn how these things work. So that is a contributing factor to some of the declines in the Nasdaq.

WONG: In other words, while the US economy is pretty much isolated from the ups and downs of the cryptocurrency so far, things are going fast. Crypto-assets are becoming increasingly mainstream.

HIRSCH: And that means more and more Americans are going to be exposed to that world, either directly through their own investments or indirectly by owning shares in companies that have put money in crypto. And Jamie says that is something the government is very aware of.

COX: I think the regulation was already upgraded, but it will definitely come in a big way. You’ll see the SEC regulate to get investment advisers and things like that to have higher trust standards. And then you’ll get Congress to come in and basically have a framework where it’s going to be very, very difficult to have these things, you know, negotiable and operational in the United States.

HIRSCH: Regulation – it may sound like cruelty to freedom-loving crypto-heads. But Emma Rose Bienvenu at Pantera Capital – remember, Pantera invests exclusively in cryptocurrency – she agrees that there is a need for some regulation, if nothing else, to protect individual investors.

BIENVENU: It’s a kind of trope that, you know, people who work in crypto-investment companies are anti-regulation and, in a way, you know, libertarians. In fact, that is not the case at all for us. We think sensible regulation will be very good. And many very dishonest projects, you know, led to many kinds of people who simply did not know how these products work, losing their savings. And that is unacceptable.

WONG: Many people believe that the blockchain and the cryptocurrency are the future of finance. Even governments board the crypto train. But this does not mean that in the future the crypto market will be less volatile or risky than it is today.

HIRSCH: Yes. In fact, it can mean greater risk to the economy as these companies become larger and more people invest in them. So yes, we can afford to wave off if not ignore this latest crypto-meltdown, but we probably will not have that luxury that much anymore.

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WONG: This episode of THE INDICATOR was produced by Jamila Huxtable and directed by Isaac Rodrigues. It was fact checked by Catherine Yang (ph). Viet Le is our senior producer. And Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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