Despite the boisterous support from blockchain bulls, we must call a spade a spade: the current selloff in the digital markets is an unmitigated crypto disaster. Since the price of multiple cryptocurrencies peaked in late 2017/early 2018, the blockchain complex lost nearly $700 billion in value.
An even more startling statistic is that the trailing one-week period is the worst in blockchain-market history. Typically, one-off metrics don’t mean much in and of themselves. But when you combine the fact that bitcoin melted down from its near-$20,000 peak, and has shown little upside momentum afterwards, investors naturally worry.
After all, you cannot blame this latest crypto disaster solely on “weak-handed investors.” As I wrote for Crush The Street a few days ago:
But just how many of these shaky-kneed individuals exist? I think we can safely assume that after the crypto market’s rapid fall from their end-of-year 2017 highs, most weak-hands have left the room. If we see sharp declines right now, we can’t blame ignorant newcomers.
At the time, I forwarded a plausible explanation for the crypto disaster: Uncle Sam. Through various criminal investigations, the Justice Department has had their hands on “blood crypto,” which they can easily auction off. Since these are ill-gotten gains, the federal government doesn’t follow free-market rationality when dumping blockchain assets.
That could explain why bitcoin has been so volatile recently. But regardless of this concept, we should bring the crypto disaster into a broader context.
Crypto Disaster is a Drop in the Bucket
I’m not here to suggest that the crypto disaster doesn’t hurt, because it does. I’m also not here to suggest that the blockchain selloff is nothing to worry about. We’re in this business of investing to make money, not to celebrate losing it.
But panicking without justification can lead to severe financial consequences, which is what we should avoid. In this case, I think it helps to bring in a broader context: compared to the losses seen in the stock market, the so-called crypto disaster is merely a drop in the bucket.
While cryptocurrencies have lost $700 billion over a roughly a one-year period, the stock market has given up trillions. Between early January and late February of this year, the benchmark S&P 500 hemorrhaged $3 trillion in two weeks’ time. To put this into context, Black Monday of 1987 resulted in $500 billion evaporating.
More recently, the stock market gave up nearly $2 trillion for the month of October. Primarily, losses from the technology sector saw the S&P 500 give up nearly the equivalent of Italy’s 2017 GDP. Bear in mind that Italy ranks ninth among GDP powers, while Canada rounds out the top ten at $1.65 trillion.
The ultimate message is this: we should be far more worried about the stock market, which leverages paradigm-shattering wealth. On the other hand, the total value of all cryptocurrencies never once exceeded the trillion-dollar mark.
So even if we suffer a complete crypto disaster, the world would remain largely unchanged. But if the S&P 500 has a hiccup, it could catalyze a global recession.