Are Crypto Crashes Building to Become the Next Dot-Com Bubble Burst?

Concept of bitcoin destroying the concrete wall with dollar graffiti, 3d illustration.
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While cryptos have been gaining increasing interest, their value has plummeted in the past few weeks, and some experts say the trend is “similar to the dot-com bubble in the 90s.”

See: 71% of Institutional Investors Plan to Buy Crypto
Find: Crypto Market Crashes, Wiping Out $90 Billion in 24 Hours

“While you have just a small number of people speculating in stuff — if they lose their money, they lose their money. Once you get embedded in the financial system there are bigger problems,” John Quiggin, an economist at the University of Queensland in Australia, told Money.

Just this week, Bitcoin fell below $30,000 for the first time since Jun. 22, wiping out almost $90 billion off the crypto market in 24 hours.

This represents a loss of more than 50% from its all-time high of $65,000 in April.

The last time cryptocurrency prices plummeted, in 2018, Bitcoin fell by as much as 80%, Money reports, adding that this event “happened in a financial vacuum,” as Bitcoin transactions were isolated and platforms such as Coinbase had little or no links to public markets or the broader economy.

Now, however, Bitcoin is inside the system, Money argues, which could cause a systemic risk threat.

“Many of the same participants who own cryptocurrencies are also long speculative stocks and growth, like Nasdaq [stocks],” said Lorenzo Di Mattia, the Sibilla Global Fund manager who was one of the first people to forwarn investors about the 2008 stock crash during which $1.8 trillion in value was lost from an index of 170 internet stocks, beginning a recession.

Building Wealth

There are several ways cryptos have become tethered to the broader financial system. First, cryptos’ market value — which stands at $1 trillion — “is suddenly far more than a drop in the financial ocean. When the sums at stake are that large, implosions typically cause ripple effects,” Money says.

Then, Money argues that Bitcoin has deep ties to the financial market. Bitcoin has also developed significant links to the broader stock market. For example, it says that Coinbase “is vying with Intercontinental Exchange to be the largest publicly traded financial exchange by market value, with a current worth of $46 billion.”

Finally, “the most dangerous way that cryptocurrency markets are tied to the U.S. economy is through a multibillion-dollar hybrid currency that’s literally called Tether,” Money reports.

See: Which Cryptocurrency Are You Invested In? Take Our Poll
Find: Millennial Millionaires Are Getting Rich Off Crypto — Older Generations, Not So Much

Tether, a stablecoin, is the most popular stablecoin and is widely used for trading, loans and earning interest, GOBankingRates reports.

“If investors suddenly bailed out of the Tether cryptocurrency en masse, it could be forced to dump commercial-paper holdings. That, in turn, could rattle confidence in the broader commercial-paper market. It was a crunch in the commercial-paper market that transmitted the great financial crisis into the heart of the real U.S. economy in 2008,” Money says.

Building Wealth

To protect your investments, financial planners recommend having no more than 5% of your money in cryptocurrency or other volatile assets.

More From GOBankingRates

About the Author

Yaël Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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