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How is crypto a systemic risk? From my recollection of the 2008/09 financial crisis, systemic risks were those in which entities were deeply intertwined with o

How is crypto a systemic risk? From my recollection of the 2008/09 financial crisis, systemic risks were those in which entities were deeply intertwined with one another on a massive scale, such that there failure would potentially bring down the entire system of finance. We're talking: retail banking (payments, savings, lending), commercial banking (idk?), public debt markets (bigco and gov funding), but most especially short term commercial funding. Again, going on memory, failure of short term funding (repo (?)) markets would have caused real, non-finance companies to become insolvent or at the very least massively impair their working capital positions. This has the knock on effect of reducing demand throughout their supply chains and major cost cutting (job loss). Etc etc. In other words, massive recession or even deep depression. Crypto, on the other hand, seems to be mostly a casino, a big one, yes. But one that is not deeply intertwined with other parts of the financial system. Coinbase, for instance, is not systemically important. It doesn't (yet) have tendrils in so many important lines of business as did the megabanks of yesteryear.

l-lousy 5y ago
It may be that the original poster meant that it may upend and take over the current system if the Govt can’t regulate it in some way
mlac 5y ago
When that much money goes “poof”, it’s going to have real world consequences. And the people who are going to get burned are the last ones on the bus - the least technical, the ones who think it will make them rich, the ones who can’t afford it.
- SilasX 5y ago
  Yes, but the parent's point (and my concern as well) is that "market crash" does not necessarily mean widespread fallout (e.g. Black Monday in '87); that only happens when the losers are tightly coupled to other critical parts of the economy, which isn't necessarily the case here: GS/JP Morgan won't have to default on loans to critical counterparties in a crypto crash, for example. Any time a big group loses wealth all at once, there's some consequence, but that's not the same as "systemic risk" where it causes catastrophe in areas not directly related.
  - mlac 5y ago
    It’s becoming widespread with all of the apps, super bowl ads, and reduced friction in getting into crypto “investing”. It used to be people who purchased crypto had to know what they were doing (and know the risk). Now anyone can buy crypto without any understanding of anything after seeing a 30 second commercial about smart investing.
    - SilasX 5y ago
      Again: being widespread is not the same as being a systemic risk. That just means it's a casino everyone wastes money in. Who is defaulting on critically important obligations because of a crypto crash? What creditworthy business isn't getting a loan to cover cash flows for the quarter because BTC fell to 10k?
      - deleted 5y ago
        [deleted]
      - mlac 5y ago
        If it gets bad enough, it will increase the number of consumers who are defaulting on credit cards, mortgages, auto loans, and student loans.
        vietthan 5y ago
        likely not, the dotcom bubble was a big deal but it wasn't catastrophic like 2008 was and that's because of the greater coupling with financial institutions.
        mlac 5y ago
        Look at the percentage of retail investors in the dotcom bubble. It’s much easier to make very stupid plays with money today than it was then, and a lot of “average” people are going to get burned.
    - xibalba 5y ago
pjc50 5y ago
If the Tether people are to be believed, there is $80bn of "cash" that's held "somewhere" (neither investors nor investigators are clear where). That may turn out to evaporate. Allegedly it has come from "institutional investors" (which ones?) On the other hand, it's still not up to the size of Lehman ($600bn!). It's heading there.
- xibalba 5y ago
  The difference (systemic vs non-systemic) is not just about magnitude, but also in who Lehman's counterparties were and the effects when those counterparties (those who were exposed to Lehman) could not get their expected capital (and the chain reaction of events that sets off throughout the capital markets and then the real economy). I remember reading some stat that claimed Lehman had derivative contracts with total notional value in the 10s of trillions.

l-lousy 5y ago

It may be that the original poster meant that it may upend and take over the current system if the Govt can’t regulate it in some way

mlac 5y ago

When that much money goes “poof”, it’s going to have real world consequences. And the people who are going to get burned are the last ones on the bus - the least technical, the ones who think it will make them rich, the ones who can’t afford it.

SilasX 5y ago
Yes, but the parent's point (and my concern as well) is that "market crash" does not necessarily mean widespread fallout (e.g. Black Monday in '87); that only happens when the losers are tightly coupled to other critical parts of the economy, which isn't necessarily the case here: GS/JP Morgan won't have to default on loans to critical counterparties in a crypto crash, for example. Any time a big group loses wealth all at once, there's some consequence, but that's not the same as "systemic risk" where it causes catastrophe in areas not directly related.
- mlac 5y ago
  It’s becoming widespread with all of the apps, super bowl ads, and reduced friction in getting into crypto “investing”. It used to be people who purchased crypto had to know what they were doing (and know the risk). Now anyone can buy crypto without any understanding of anything after seeing a 30 second commercial about smart investing.
  - SilasX 5y ago
    Again: being widespread is not the same as being a systemic risk. That just means it's a casino everyone wastes money in. Who is defaulting on critically important obligations because of a crypto crash? What creditworthy business isn't getting a loan to cover cash flows for the quarter because BTC fell to 10k?
    - deleted 5y ago
      [deleted]
    - mlac 5y ago
      If it gets bad enough, it will increase the number of consumers who are defaulting on credit cards, mortgages, auto loans, and student loans.
      - vietthan 5y ago
        likely not, the dotcom bubble was a big deal but it wasn't catastrophic like 2008 was and that's because of the greater coupling with financial institutions.
        mlac 5y ago
        Look at the percentage of retail investors in the dotcom bubble. It’s much easier to make very stupid plays with money today than it was then, and a lot of “average” people are going to get burned.
  - xibalba 5y ago

pjc50 5y ago

If the Tether people are to be believed, there is $80bn of "cash" that's held "somewhere" (neither investors nor investigators are clear where). That may turn out to evaporate. Allegedly it has come from "institutional investors" (which ones?) On the other hand, it's still not up to the size of Lehman ($600bn!). It's heading there.

xibalba 5y ago
The difference (systemic vs non-systemic) is not just about magnitude, but also in who Lehman's counterparties were and the effects when those counterparties (those who were exposed to Lehman) could not get their expected capital (and the chain reaction of events that sets off throughout the capital markets and then the real economy). I remember reading some stat that claimed Lehman had derivative contracts with total notional value in the 10s of trillions.