Does Bitcoin pose a systemic risk to markets and/or to the economy more generally?
The consensus answer on that is “no”. And this is (another) case where the consensus answer may be wrong.
Over the past month, we’ve variously suggested that it’s only a matter of time before people start borrowing money to speculate in cryptocurrencies. In the same vein, we also contend that paper wealth (and there’s a lot of irony in describing unrealized crypto gains as “paper” wealth) created by trading in Bitcoin and other cryptocurrencies is already collateralizing loans whether lenders realize it or not.
“If your net worth has just increased exponentially thanks to gains in cryptocurrencies, how long is it going to be before that gain starts getting factored in when it comes to securing lines of credit?,” we asked in a recent post for DealBreaker, before fleshing things out as follows:
I mean obviously you’re not going to put an asterisk by your net worth that draws people’s attention to a handwritten footnote that says “this is subject to change depending on the price of make-believe space tokens that are so volatile I can’t even give you a rough estimate of where they might be trading without checking my phone”, so how are lenders going to know if this starts becoming an input in their models?
The answer to the question in bold is that lenders wouldn’t know. And neither would the people providing lines of credit and issuing loans know if people were using the money to speculate on a continued rise in Bitcoin and other cryptocurrencies.
Of course some startups are now embracing the idea of Bitcoin as collateral for cash loans. We documented that rather disturbing turn of events here.
Well given all of the above, allow us to say that you better hope the following two charts are nothing more than a “happy” coincidence:
Obviously, those charts are apples to oranges.
But you know, what if they aren’t?…