In 2008, the values of certain structured financial products based on peak U.S. mortgages fell, resulting in a worldwide recession and the loss of millions of jobs.
If you had asked an average individual back in 2007 how it would affect their life if investors ended up mispricing the advanced risk in synthetic debt obligations created out of sub-optimal mortgage shares, they would most likely have no clue of what you were even saying. However, the result of this had quite drastic effects on many people.
The rationale was that the individuals who purchased sub-optimal CDOs (typically banks or shadow institutions) also loaned money to buy other items.
When these CDOs failed, they were forced to sell other assets to repay their loans, which pushed down the cost of other assets, causing broad market dispersion, destroying a lot of wealth, reducing economic activity, and so on.
Nevertheless, banks had lost capital, becoming more risk apprehensive and unable to lend, reducing economic activity. As a result, ordinary people lost their jobs as a result of a financial instrument that they had never heard of.
If you had asked a typical individual a fortnight ago, how it would impact their life if the values of some monkey Jpeg images and algorithmic stablecoins crashed, the majority of people would have replied, “I don’t own an ape JPEG and don’t plan on buying one, so this would have no influence on me at all.” They would indeed have been correct.
The crypto world has little impact on the real economy, and if cryptocurrency values drop, the remainder of the financial sector would be relatively unaffected. However, this is questionable at this time.
At the very least, cryptocurrency has begun to penetrate the mainstream financial system.
Some conventional investors also possess cryptocurrency. If their cryptocurrency drops in value, they may have to sell their other assets.
Because certain public corporations are exposed to cryptocurrency (because they are cryptocurrency exchanges or have leveraged crypto holdings, for example), the standard old index fund may fall when cryptocurrency falls.
If you had pressed a magic button five years ago and made all cryptocurrencies worth nothing, nothing much would have transpired. A few oddballs dabbling with a fancy new currency known as Bitcoin would have failed. They would have responded by saying that it was fun for a while.
Thus, if every crypto had dropped to zero five years ago, a lot of individuals would have suffered huge losses. There would have been little impact on the fundamental financial system. The year would’ve been difficult for Lamborghini dealerships, on the other hand.
However, most individuals would be unconcerned.
Should every crypto coin drop to zero in a few years – well, we don’t know what the next few years may bring, but a realistic outcome is that crypto may continue to integrate into the actual economy – more blockchain companies would be large, influential, and connected with other firms. Its shares may be included in indexes, and it may loan capital from banks and utilize its own cash to fund actual businesses.
More conventional investors may hold crypto and make leveraged bets on it; if those bets fail, they may dump more liquid conventional assets, causing crypto markets to spread to equities and bonds.
Ordinary people may invest their money in crypto marketplaces, and those assets would be utilized to finance genuine, non-crypto company activity. Your mortgage may come from a decentralized banking network or somewhere else.
The Bottom Line
Cryptocurrency has been growing quite substantially and has begun integrating into the standard financial market. Due to this, the impact of movements in this volatile marketplace is starting to affect more conventional investment options.
The concern is that this volatility may start spreading into the financial sector and destabilize conventional markets as we know them. It is crucial that individuals are aware of the potential impacts of this.
Even individuals who do not invest in crypto themselves may be affected by the impact of the decision to integrate these coins into everyday life.