Bitcoin’s (BTC) recent surge has raised fears that the cryptocurrency could be approaching bubble territory. But if it were to burst, it wouldn’t be that big of a deal for the broader financial markets, according to analysis from Capital Economics.
“Unlike the bubbles in the tech sector in the late-1990s and in US residential property a few years later, a bursting of the bitcoin bubble should not have systemic, macroeconomic implications,” analyst Andrew Kenningham said. “The total value of bitcoin is (still) too small, and it has few links with the wider economy.”
In the last week, the price of the cryptocurrency has jumped more than 40%. Year-to-date, it’s up more than 1,900%. It was last priced above $15,078 on Friday afternoon. Bitcoin’s current market cap is about $252.6 billion, according to Yahoo Finance’s cryptocurrency tracker.
If the bubble bursts
“There are several channels through which a bursting of an asset price bubble can have macroeconomic consequences, but none is a major risk in the case of bitcoin. First, there may be a hit to household spending as people who have invested suffer losses. But bitcoin’s market [capitalization] is too small for this to be a worry,” according to the report.
What’s more, a complete bitcoin crash would be the equivalent of just a 0.6% fall in U.S. stocks, the report said. Furthermore, most of the investors in the cryptocurrency got in early, which would make those losses much smaller.
Another reason cited is that bitcoin is not woven into the banking system.
“While a bursting bubble can affect the economy via the banking sector, this is not much of a risk either, precisely because bitcoin is held and traded outside the banking sector. Also, there is no evidence that investment in bitcoin is being financed by the equivalent of sub-prime mortgages.”
Plus, there’s almost no correlation between bitcoin and risk assets like stock prices. So at the very least, it would be unclear if there would be any second-order effects in the rest of the markets.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.