Will crypto-wealth destruction have a real world impact?

Thought of the day

by Chief Investment Office 18 Jan 2018

It’s been an awful month for cryptocurrencies. Expectations for regulatory crackdowns in China and South Korea helped halve the total cryptocurrency market cap in just 10 days, wiping more than USD 400bn from its global value.

But while the fizzling of the cryptocurrency bubble is notable, real world economic fallout looks limited, in our view:

  • Limited wealth effects. The Dotcom bust in 2000 destroyed more than USD 8trn of paper wealth, yet resulted only "in a relatively short and mild recession and no major financial instability," according to former Federal Reserve Chair Ben Bernanke. The much smaller damage to consumer wealth and sentiment from the cryptocurrency collapse should be easily absorbed by a growing global economy.
  • Limited market impact. Very few listed companies have been hit by cryptocurrencies’ drop in value, or any subsequent decline in trading activity. Recent divergence in China’s tech-heavy CHINEXT and large-cap CSI 300 was cited by some as contagion, but instead reflects long-running market dynamics.
  • Regulatory foresight. Regulatory curbs by South Korea, an early adopter, and China should also reduce the likelihood of cryptocurrencies infiltrating more fields of economic activity. This should limit the economic exposure to cryptocurrency price swings.

So while we are monitoring the fallout, we see little cause for economic concern from the cryptocurrency decline. Calling an end to the bubble could be premature; cryptocurrencies have recovered from earlier setbacks. But investors should focus on more predictable, well-established assets with real cash flows, like global equities, in our view.

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