Keeping Crypto in Context

For all the hype that surrounds them, crypto currencies are quite small relative to global financial markets.

Bitcoin’s market-cap is now comparable to a large US equity. Within the context of global markets, the total crypto market cap is relatively small, standing at $990bn from a peak of almost $3tn. This compare to the US equity market at $34tn; Bitcoin would be around the 10th largest company by market cap in the S&P500.

The chart above shows crypto market caps are also small in the context of other asset classes. Given the inherent volatility relative to fixed-income and credit, the Citi report says it is unlikely Bitcoin could support the large leveraged positions that caused wider contagion in, for example, the Asian and sub-prime crises. The chart below shows Bitcoin as a proportion of US household wealth. Even if all crypto were held in the US, even at its peak, it never made up a significant percentage of wealth.

In general, crypto is probably isolated compared to broader financial markets. Citi analysts say most mainstream financial firms are likely waiting for further regulatory clarity or are still at an early stage of exploring crypto investing.

Crypto price declines have come at a time of broad weakness in investor sentiment. Citi analysts say this is because the crypto market is grappling with the same issues as financial markets. These include increasing probabilities of a US recession, tightening financial conditions, and elevated inflation. While correlations with equity markets have remained intact, analysts have not found obvious lead/lag relationships between crypto and equities around high frequency events. Contagion has remained relatively isolated within the crypto eco-system, and was likely initially worsened by the challenging macroeconomic backdrop.

Citi wrote recently that stablecoin market caps, futures open interest and exchange leverage ratios were useful metrics to gauge borrowing levels in crypto markets. The first chart above shows stablecoin outflows have levelled off. Stablecoins are frequently used as collateral in crypto markets with reserves typically held in short-term commercial paper (CP) or US treasuries. Although not all stablecoins give full disclosure of their holdings, they would have every incentive to de-risk into short-term treasuries. According to the Citi report, the potential crypto impact on money markets should be viewed in the context of all major stablecoins summing to $120bn compared to an outstanding $23.3 trillion in the US treasury market ($1tn for CP).

For more information on this subject, please see Global Macro Strategy - Digital Asset Take

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.