What Would Happen to Crypto In a Global Market Meltdown?

A common thought experiment in the crypto community is to ponder how cryptocurrencies would fare in the event of another global financial meltdown.

There is a host of troubling developments in the global economy: the threat of a trade war, jitters in Italian debt markets, problems at Deutsche Bank and new emerging market crises in Turkey and Argentina.

That's putting a brake on the huge gains that low interest rates and quantitative easing had bestowed on global markets in the eight years since the end of the last crisis.

Some crypto hodlers salivate at the idea of market panic.

Just as the most extreme gains in crypto prices in the latter part of 2017 were inextricably linked to the rapid "Risk on" uptrend seen in stocks, commodities and emerging-market assets, so too a major selloff could easily infect these new markets.

At $300 billion, according to Coinmarketcap's undoubtedly inflated estimates, the market cap of the overall crypto token market is more than three times its value of a year ago.

It's less than 1 percent of the end-2017 market cap of $54.8 trillion for the S&P Global Broad Market Index, which includes most stocks from 48 countries.

If risk-hungry investors are panicking and looking for things to dump - or for that matter if they're looking for something safe to buy - it won't take much of their funds to move the crypto markets, one way or another.

We cannot separate the flood of money that flew into crypto at the end of the year from the fact that eight years of quantitative easing had driven a "Hunt for yield" in once-obscure markets as the return shrank on now pricey mainstream investments such as corporate bonds.

In the immediate aftermath of the panic, there would be a selloff as every market is hit by the liquidity squeeze.