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Why You Should Worry About the Next Crypto Crash (Even if You Don't Own Crypto)
Interest in cryptocurrencies like Bitcoin and Ethereum has been spreading. Now some experts are worried the next time these volatile assets crash, it could become a financial wildfire.

While cryptocurrencies have been around for more than a decade, they’ve so far been regarded as a niche asset, meaning investors who weren’t interested in the digital currencies' potential could safely ignore their price fluctuations. But, with values above $1 trillion and money managers on and off Wall Street snapping up coins, that may be about to change, according to regulators and financial pros. Earlier this week, Treasury Secretary Janet Yellen convened a study group on just this issue, looking in particular at the dangers of a subset of cryptocurrencies known as “stablecoins," which are backed by traditional currencies or other assets.

The last time cryptocurrency prices plummeted, in 2018, Bitcoin fell by as much as 80%. But the event happened in a financial vacuum. Bitcoin transactions were isolated on then-obscure venues such as Coinbase that had little or no links to public markets or the broader economy. Bitcoin was an upstart that bucked the financial system, from the outside. This time, Bitcoin -- whose price has declined 50% since April -- is inside the system.

Think of the global financial system as an orchard composed of a wide variety of trees and plants, interconnected below the surface in endlessly complex entanglements. Weeds and plants on the margins can easily be pruned before they damage adjoining areas, as happened with Bitcoin in 2018. But if a certain type of weed is allowed to grow out of control, or a new tree allowed to take root and entangle itself, rot from these new organisms can quickly threaten the entire system. This threat is called “systemic risk,” and some people fear it’s a threat that cryptocurrencies now pose.

“It’s similar to the dot-com bubble in the 90s,” said John Quiggin, an economist at the University of Queensland in Australia. “While you have just a small number of people speculating in stuff -- if they lose their money, they lose their money. Once you get embedded in the financial system there are bigger problems.”

There are three main ways that cryptocurrencies have become tethered to the broader financial system since 2018.

The market value of cryptocurrencies -- roughly $1 trillion, down from more than $2 trillion earlier this year -– is suddenly far more than a drop in the financial ocean. When the sums at stake are that large, implosions typically cause ripple effects. As CNN Money reported at the time, an index of 170 Internet stocks lost $1.8 trillion in value during the dot-com crash, an event which sparked a recession across the economy.

Instead, prepare the same way you would for a regular bear market in the stock market -- by owning a sensible mix of stocks and safe-haven assets like bonds, which tend to rise when stocks and crypto fall.

If you do invest directly in cryptocurrency (or other similarly risky assets) most financial planners recommend making these no more than 5% of your portfolio.
https://money.com/crypotcurrency-bitcoin-crash-systemic-risk/