Does Bitcoin have a grip on the economy? : The Indicator from Planet Money

SYLVIE DOUGLIS, BYLINE: NPR.

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WAILIN WONG, HOST:

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

PADDY HIRSCH, HOST:

And I’m Paddy Hirsch. The crypto-verse – that’s cryptocurrencies and all the financial technology associated with them – has had a rough time lately. The flagship crypto asset, bitcoin, has fallen sharply in value. Its market capitalization is down to roughly $390 billion – about the same level it was in December of 2020.

WONG: It’s quite a reverse from October of last year when bitcoin had a market cap of $1.14 trillion, and Matt Damon was pitching 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 aired, the total value of crypto assets has dropped by two-thirds. It was at $3 trillion. Now it’s 1 trillion – in fact, less than that. I really, really, really want to call Matt Damon up and ask him how brave he’s feeling right now. But I don’t have his number.

WONG: And he’s ignoring all my texts. I don’t know why.

HIRSCH: What? He’s such a devil.

WONG: Most investors in crypto are institutions, but a lot of individuals have made bets on crypto – some because they believe in the future of the blockchain and cryptocurrency, others because they’ve seen the gains many crypto firms have made, and they want to jump on that train.

HIRSCH: Yeah. A Pew Research Center survey found that 16% of U.S. adults said they had invested in, traded or used a cryptocurrency. That is a lot of exposure to one of the riskiest assets known to humankind, and the recent collapse adds up to a lot of money being lost by a lot of people. So we’re going to spend 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 wider economy. A lot of money was lost, and a lot of people in the crypto-verse are hurting. But what about those of us who have no exposure to crypto? And that’s most of us. How much do we really need to care?

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

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UNIDENTIFIED REPORTER #1: Because we know it has been several consecutive days of brutal selling for bitcoin…

UNIDENTIFIED REPORTER #2: Bitcoin and other cryptocurrencies have taken a nosedive as…

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

WONG: And you can divide crypto investors into two groups. You’ve got your institutions – that’s investment funds and venture capitalists and all of that. And you’ve got retail investors – people like you and me.

HIRSCH: Emma Rose Bienvenu is the chief of staff at Pantera Capital. Pantera’s a fund that invests exclusively in companies associated with 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 bull 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 its most recent high. Crypto assets fell nearly 70%. So that’s like a grizzly bear market. But Emma didn’t seem that fazed by the fallout.

BIENVENU: This wasn’t a failing of crypto or blockchain technology itself. It was the asset responding exactly as a risk on, you know, highly liquid asset would react to the market environment in which we find ourselves because of, you know, high inflation and Fed tightening. A person that doesn’t have exposure to crypto – like, I would encourage them – you know, it’s a great time to buy.

HIRSCH: A great time to buy, Wailin.

WONG: I think I’m going to pass. I’m too scared.

HIRSCH: Not a failing. Anyway, Emma would not say whether Pantera has lost money, but she pointed out that like most investment firms, hers is configured to weather, and possibly even profit from, these kinds of downturns. Now, that’s not the same for individual investors – many of whom have complained in news reports and on social media platforms like Reddit that they lost thousands of dollars.

WONG: And there are a lot of individual investors in crypto. An annual Fed survey found that 12% of American adults used or held crypto purely for investment in the last year. Now, they probably didn’t all lose their money, but that’s 31 million people. Surely that’s going to affect the economy in some way?

HIRSCH: Well, you’d think so. But Jamie Cox says probably not. He’s managing partner of Harris Financial Group in Richmond, Va.

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

WONG: Jamie’s not making light of the losses, but he says the wider economy is pretty insulated from them. First of all, the amounts of money we’re talking about are comparatively small. The market capitalization of the entire crypto market is less than $1 trillion.

HIRSCH: Yeah. A trillion dollars may sound like a lot, but it’s actually less than half of the market capitalization of Apple or Amazon. So the danger of an individual fund’s losses on crypto rippling through the market are pretty low, Jamie says. And as for those individual investor losses…

COX: The good news is, is there’s plenty of money in the system. People have jobs. They’re not at risk of hurting themselves permanently by making some bad financial choices like they would have if this had been 2008.

HIRSCH: Back then, people borrowed heavily to buy houses they couldn’t afford from banks that were willing to lend them the money, no questions asked. When the market turned down, many of those people lost everything. The banks went into a tailspin, and the entire global economy nearly collapsed.

WONG: But this time around, people generally aren’t borrowing huge amounts of money to invest in crypto. Perhaps more importantly, neither individuals nor corporations are using crypto assets as collateral for loans.

HIRSCH: This is a big deal – right? – because when people or companies borrow money, they have to provide collateral, some security. That’s some kind 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 collateral. And if you fail to make your mortgage payments, then the bank can take your home.

WONG: Companies use all kinds of stuff as collateral for the loans they borrow. But for the most part, no one right now is using crypto assets. They’re too risky, too volatile, too uncertain. And that means that the corporate loan economy – all $22 trillion of it – is not affected by what’s going on in crypto-land.

HIRSCH: And lenders’ refusal to accept crypto assets as collateral for loans is like this huge firewall between the crypto-verse and the wider U.S. economy. That’s not to say that crypto doesn’t leak through here and there. Jamie says the stock market’s a bit of a weak link because publicly traded corporations are increasingly beginning to dabble in crypto.

COX: There’s lots of ownership in cryptocurrency that didn’t exist a couple of years ago. The more notable ones are Tesla or MicroStrategy, but there are plenty of others – insurance companies and the like – who have taken positions, albeit small relative to their balance sheet, but trying to learn how these things work. So it’s a contributing factor to some of the declines in the Nasdaq.

WONG: In other words, while the U.S. economy is pretty insulated from the ups and downs of the crypto-verse for now, things are moving fast. Crypto assets are becoming increasingly mainstream.

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

COX: I think that regulation was already being teed up, but it is definitely going to come in a major way. You’re going to see the SEC regulate to make investment advisors and things like that have higher fiduciary standards. And then you’re going to have Congress come in and basically have a framework where it’s going to be really, really difficult to have these things, you know, negotiable and operable in the United States.

HIRSCH: Regulation – that might sound like a bummer for freedom-loving crypto-heads. But Emma Rose Bienvenu at Pantera Capital – remember, Pantera invests exclusively in the crypto-verse – she agrees that some regulation is needed, if only to protect individual investors.

BIENVENU: There’s kind of a trope that, you know, people who are working in crypto investment firms are anti-regulation and just kind of, you know, libertarian. That’s actually not the case at all for us. We think sensible regulation would be very good. And a lot of very dishonest projects, you know, led to a lot of sort of people that just didn’t really know how these products work losing their life savings. And that is unacceptable.

WONG: A lot of people believe that the blockchain and cryptocurrency are the future of finance. Even governments are getting on board the crypto train. But that doesn’t mean that going forward, the crypto market is going to be any less volatile or risky than it is today.

HIRSCH: Yeah. It could actually mean greater risk to the economy as these companies get bigger and more people invest in them. So yes, we can afford to wave off if not ignore this latest crypto meltdown, but we probably won’t have that luxury for very much longer.

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WONG: This episode of THE INDICATOR was produced by Jamila Huxtable and engineered 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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