Christopher Harvey Thinks Maybe He’s Not Getting Through To You When It Comes To Crypto Spillover Risk

So Wells Fargo’s Christopher Harvey thinks maybe you might be a little dense.

Last month, Harvey tried to warn everyone that a cryptocurrency collapse won’t happen in a vacuum as many folks seem to assume it would. Rather, a collapse in Bitcoin or in the space in general would invariably spill over into other assets.

That makes all kinds of sense based on anecdotal evidence and also based on the fact that thanks to futures, Bitcoin is now literally embedded in the broader financial system.

We’ve spent an inordinate amount of time (although “inordinate” implies that it’s not worth talking about at length, so maybe that’s not the right word) discussing the extent to which unrealized gains in cryptocurrencies have almost invariably ended up affecting people’s financial decisions, whether that means emboldening folks to take more risk in other assets based on an assumed cushion from crypto profits or whether that means overspending on the assumption that those profits won’t ultimately disappear into thin air.

The other thing we’ve posited is that cryptocurrency “wealth” (and unlike Donald Trump, we don’t use scare quotes for no reason) has ended up collateralizing loans, although it’s not at all clear whether lenders realize that. Here’s what we said last week:

A lot of people have gone out of their way over the past year to claim that Bitcoin (and cryptocurrencies in general) don’t pose a systemic risk to the financial system or to the economy in general. That may or may not be true and we don’t pretend to be the arbiter on the subject.

What we do know, however, is that in addition to the obvious risk posed by embedding  cryptocurrencies into established markets via futures and other instruments, there are two ways in which cryptocurrencies could, in theory, end up posing a systemic risk:

1. cryptocurrencies end up collateralizing loans
2. people start borrowing to buy cryptocurrencies

You’ll not that those are just two sides of the same (bit)coin. In the first case, you already own cryptocurrencies and you’re borrowing against your unrealized gains and in the second case, you’re borrowing in order to speculate in cryptocurrencies. Either way, lenders end up (wittingly or, more likely, unwittingly) exposed to the vagaries of the cryptocurrency market.

Some companies are actively seeking to lend against crypto collateral — as in, that’s the business model. But one certainly imagines that other lenders are doing the same thing, only not intentionally.

Well on Wednesday, Christopher Harvey was back on CNBC sitting against the same backdrop as he was a month ago but mercifully wearing a different colored tie which is really the only way to differentiate this appearance from the previous cameo:

And although he doesn’t say anything new per se, the fact that no one seems to fully appreciate the point he’s making means it’s worth listening to him make it again. Here’s Wednesday’s clip:

Of course critics will immediately point to the fact that equities soared on Wednesday amid the crypto carnage, but that hardly proves anything. We’d be willing to bet that anyone who’s in that space was glued to the screen amid the chaos trying to figure out whether to buy the dip or sell it all immediately.

Once the end game plays out and the losses are actually booked we’ll get to see whether the despair that accompanies the final rout will spill over into all the places Harvey seems to think it will.