100  Blockchain

Leverage

• 90% of the money invested in Bitcoin is spent on derivatives like ‘per-

petual swaps – bets on future price fluctuations that never expire’. As

most of these transactions are traded on unregulated exchanges (such

as FIX and Binance), customers could also borrow more to make bets

even bigger. Exchanges would take a hit and swallow big losses on

defaulted debt.

• The investors would try to liquidate conventional assets to meet the

margin calls in cryptocurrency. They might also give up trying to

meet the calls and it will trigger liquidations.

• Regulated exchanges and banks have a lot of faults as they lent dollars

to investors who then bought Bitcoin. Some even lent dollars against

crypto collateral. In both cases, borrowers will default and might seek

to liquidate other conventional assets.

Stablecoins

• It is a cumbersome process to change dollars for Bitcoin. For this rea-

son, cryptocurrency traders use stablecoin, which is pegged to the

dollar or euro, to realise gains and reinvest proceeds. Some of the

stablecoins are Tether and USDC coins. Investors issues back their

stablecoins with piles of assets in money market funds. For instance,

Tether has 50% of its assets that were held in commercial paper, 12%

in secured loans and 10% in corporate bonds and precious metals at

the end of March 2021. They are worth more than $100bn. A cryp-

tocurrency crash could lead to a run on stablecoins, which will force

issuers to dump their assets to make redemptions.

Market sentiment

• Cryptocurrency collapse could affect the broader sentiment of the

market including crypto as well as mainstream. Low interest rates

have led investors to take more risks by investing in stocks and cryp-

tos. A crypto collapse could cause them to cool on other exotic assets.

• Recently, conventional banks have started offering crypto exchange-

traded funds and also debit cards that pay customer rewards in

Bitcoin. Crypto collapse will also have the potential to cause wider

market disruption.

• In summary, leverage, stablecoins and market sentiment are the main

channels through which any crypto downturn can happen which in

effect causes a market-wide impact.