How Crypto Became The New Subprime

How Crypto Became The New Subprime?

The 2007 Subprime mortgage crisis and the subsequent global recession had a massive impact on the world’s economy that’s still causing problems today.

With the recent crash of the cryptocurrency market, many have drawn parallels between the two and the factors leading up to their collapse.

But is crypto really the new Subprime, and how will the crypto crash affect the global economy given its sudden demise?

Let’s take a closer look, shall we?

Subprime: The Crash That Brought The Global Economy To Its Knees

First of all, let’s take a look at the background behind the Subprime crash. Subprime lending referred to loans (mostly mortgages) given to people with poor credit who would struggle to pay them back.

The idea here was that it would give people who would otherwise be unable to take out a mortgage the option to buy a house, even if they couldn’t actually afford it.

However, the sharp increase in lenders offering high-risk mortgages coupled with rapidly rising housing prices fueled a housing bubble that was ready to burst.

When the housing market collapsed and interest rates soared, subprime mortgages plummeted in value.

Many borrowers were unable to refinance their loans and defaulted, compounding the issue and having a knock-on effect on the stock market and job opportunities.

As a result, the subprime mortgage crisis was one of the major contributors to the housing crisis and a lead cause of the 2008 financial crash and Great Recession, the effects of which are still influencing the US and global economies to this day.

Is Crypto Crashing?

So now that we’ve covered some of the background of Subprime, let’s take a look at how crypto is following in its footsteps.

Cryptocurrencies came into use in 2009 with the introduction of Bitcoin, and saw a massive boom in popularity over the early 2010s and throughout the following decade.

Since the invention of crypto, many other cryptocurrencies have also been created and seen surges in success, such as Ethereum, Tether, and (in more recent years) NFTs.

Crypto didn’t see exclusively smooth sailing, however, and the digital currencies have been notorious for their volatile values with soaring highs and plummeting lows.

For example, Bitcoin has seen drops in its value of over 65%, and increases of more than 2000%! 

This volatility hasn’t stopped the global cryptocurrency market from rising rapidly over the past decade, however, with a total value of over $3 trillion at its peak.

But considering how prone crypto is to crashing, it’s unsurprising that the market had to break at some point. In early 2022, the crypto market recorded a massive crash, wiping $1.2 trillion in value in the space of just a few months.

Bitcoin suffered particularly heavy losses, dropping in value from its November 2021 peak of $65,000 to just $20,000 in June 2022, a loss of over 60%.

What Caused The 2022 Crypto Crash?

While this massive crash in the crypto market is undeniably devastating for investors, what actually caused it to happen? As it turns out, it can’t be narrowed down to a single reason.

One of the largest factors in the 2022 crypto crash is the de-pegging of Terra/LUNA.

TerraUSD, a cryptocurrency linked to the Terra blockchain, was designed to be a ‘stablecoin’, meaning that its value was intended to be tied to the US dollar – essentially, one TerraUSD (or UST) should always be equal to one USD.

UST was directly linked to LUNA, TerraUSD’s sister coin with a value influenced by the crypto market as opposed to the USD.

However, tightening of the US Federal Reserves monetary policy de-pegged UST from its 1:1 exchange rate with the US dollar; this plummeted the value of UST to less than 0.01% of its original value, taking LUNA with it and rendering both cryptocurrencies effectively worthless.

The knock-on effect of this destabilized the entire crypto market, wiping out more than $200 billion of the market in a matter of days.

Another influence on the crypto crash is rising interest rates.

As we’ve mentioned already, cryptocurrencies are notoriously volatile; an increase in interest rates (along with further rises in the future) has incensed a lot of investors into cashing in these risky assets to avoid heavy losses.

While this might seem like a safe bet in the short term, the sudden removal of crypto assets tipped the already unsteady crypto market into dangerous territory.

This has had the most notable effect on technology stocks (particularly ones relating to blockchain tech, such as IBM, Meta, and even Amazon), which have dropped by up to 70%, and NFTs.

The NFT market, while always volatile, has been hit especially hard by rapid crypto sell-off; OpenSea (one of the world’s biggest NFT marketplaces) has laid off more than 20% of its staff amid the crisis, while major NFT marketplace builder ImmutableX is down 73% due to the crash.

Is Crypto Really The New Subprime?

While it’s hard to ignore the similarities between the crypto crash and the Subprime mortgage crisis, it’s unlikely that the drop in cryptocurrencies will have anywhere near the same economic impact as Subprime.

How Crypto Became The New Subprime

The main factor here is scale – while a $1.3 trillion loss is undeniably massive, it comes nowhere near the $8 trillion lost by the US alone during the Subprime crisis.

Additionally, crypto has seen these massive drops before and bounced back; 70% losses were common at the currencies’ most volatile points, and the largest loss was more than 90%.

The biggest similarity between the two is the people who are most affected by the crypto crash – the everyday people buying.

The Subprime crisis disproportionately hurt borrowers, who were left in bankruptcy after being drawn into the lending scheme without knowing its risks – in particular, the crash hurt those with low credit scores (who were targeted for subprime lending) and minorities.

Likewise, most crypto traders are younger people who stand to lose the most financially; almost half of traders are women, and over 20% of them are a minority group.

So while the crypto crash may not be on the same scale as the Subprime crisis, the parallels are pretty clear – the traders are the ones who have the most to lose, and the crash will cost them dearly.

Final Thoughts

It’s unclear where the crypto crash will take the global economy in the future.

While it’s hard to deny how similar the crash is to the 2007 Subprime mortgage crisis, it’s unlikely to have the same financial impact on such a global scale.

But while cryptocurrencies aren’t likely to be going anywhere anytime soon, one thing is clear – like the Subprime crisis, the average buyer is the one who will feel the crash the most.