Crypto risks and ownership in Europe

plus: geopolitics + trade, market reactions and more

“Sometimes what is most familiar can be as difficult to perceive accurately as what is wholly missing.” – Hannah Pitkin ||

Hello everyone, I hope you’re all doing well! Like I said yesterday, I have a choppy week ahead, so today’s newsletter is brief and early as I have to dash out the door in a few minutes – and tomorrow, I have to skip publication entirely. Back on Thursday!

Yesterday I guest-hosted Scott Melker’s Macro Monday show, with the usual gang Dave Weisberger, Mike McGlone and guest Peter Tchir – you can watch the playback here.

IN THIS NEWSLETTER:

• ECB: Crypto risks and ownership in Europe

• Macro-Crypto Bits: Geopolitics + trade, market reactions

If you’re not a premium subscriber, I hope you’ll consider becoming one! You get ~daily commentary on markets, tokenization, regulation and other signs that crypto IS impacting the macro landscape. As well as relevant links and music recommendations ‘cos why not.

WHAT I’M WATCHING:

ECB: Crypto risks and ownership in Europe

Reports from central banks tend to be dull and self-serving, but they’re usually worth a read anyway, especially for what they say about institutional concern. And they sometimes throw off some worthwhile data (although, often, their data visualization could use some work).

For instance, the latest Financial Stability Review from the European Central Bank (ECB), published last month, contains an entire section on crypto markets and their growing relevance to traditional finance. This is a far cry from the message in central bank publications of just a few years ago dismissing crypto as a “speculative corner” of finance that should be suppressed. Now, there is general acceptance that crypto is here to stay but that even comprehensive regulation, such as the EU’s MiCA framework, isn’t enough to protect investors from the risks.

According to the ECB, these include:

Adverse wealth effect. If prices go up, then they can come down and that’s bad. To be fair, the concern is more around a crash given crypto asset price volatility, and the spillover effects into the broader economy, especially given the increase in traditional investor positioning. The same argument can of course be applied to tech and other “growth” stocks, but I imagine the central bank would counter-argue that they’re ok because they directly contribute to GDP.

The report also points out that Bitcoin’s supposed “diversification” benefit is minimal, as it typically shows high correlation to other risk assets such as equities, and low correlation to “safe havens” such as gold. Regular readers will know I think correlations are a flimsy basis for any forward-looking argument as they look backwards and are tenuous at best, but it’s not unreasonable to question the diversification thesis.

Institutional exposure. “Significant institutions” in the euro area provided custody services for roughly €400 million-worth of crypto assets in 2023; in 2024, this had ballooned almost 12x to €4.7 billion. Direct exposure is still insignificant, although this also exploded in 2024, from €66,000 to around €1 million. The implication here is that volatile crypto assets could weaken bank health and therefore the stability of the sector.