Crypto poses no major risk to economy

  • Goldman Sachs said that in comparison to equities, cryptos constitute a minuscule part of the total U.S. household.
  • The broader cryptocurrency market has eroded more than $1 trillion of investors’ money over the last year attracting strong attention from regulators.

Wall Street banking giant Goldman Sachs has come out with some clarity on the biggest worry whether the crypto market meltdown will have any major impact on the U.S. economy. The United States is one of the biggest crypto markets with native households constituting one-third of the entire crypto market.

Goldman Sachs shares some interesting details to explain that the crypto market drawdown won’t have any severe impact on the country’s economy. By the end of the last year 2021, the overall U.S. household net worth stood at $150 trillion. Although the crypto market has wiped out $1 trillion over the last year, it is “very small” to the U.S. household net worth. In a note to investors on Thursday, May 19, Goldman Sachs economists led by Jan Hatzius wrote:

We therefore expect any drag on aggregate spending from the recent declines in cryptocurrency prices to be very small as well.

Drawing a comparison between stocks and crypto

Looking at the current macroeconomic setup, the Unites States is staring at inflation. On one hand, the U.S. is facing four-decade high inflation. To control this the Fed has started tightening its monetary policy with interest rate hikes. Thus, it’s pulling out excess liquidity from the market.

This has led to a severe correction in the U.S. equity market this year in 2022. All of the top three indices on Wall Street are down more than 20 percent year to date. Amid this massive sell-off in the equity and the crypto market, economists are having a close watch on how it could impact the U.S. economy.

Bloomberg quotes a study stating that for every dollar lost in stocks, it reduces spending by 3 cents. The five-month sell-off this year has reduced the spending potential by $300 billion. Goldman Sachs reported that by the end of 2021, equities constituted 33 percent of the total U.S. household. On the other hand, crypto holdings constitute only 0.3 percent of U.S. households’ net worth. The economists at Goldman Sachs wrote:

These patterns imply that equity price fluctuations are the main driver of changes in household net worth, while cryptocurrencies are only a marginal contributor.

The U.S. regulators on alert mode after the Terra collapse

Despite crypto’s little impact, the U.S. regulators have been on an alert mode after the recent collapse of the Terra ecosystem. On Wednesday, U.S. SEC Chairman Gary Gensler expressed his concern about the recent events. Speaking before a congressional subcommittee, Gensler said:

I think a lot of these tokens will fail. I fear that in crypto…there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets writ large.

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