Wildfires in Los Angeles, United States, have escalated rapidly, reaching more than 16,000 hectares (40,000 acres) and leaving a trail of devastating economic losses.

Insurers with significant exposure to the sector face a potential collapse that threatens to ripple across the economy, analysts at financial newsletter The Kobeissi Letter say.

Insurance-estimated financial losses have already exceeded $20 billion, a 60% increase compared to the costliest wildfire recorded in the United States so far.

Estimated losses for insurers amount to USD 20 billion. Source: The Kobeissi Letter.

Companies like Mercury General (MCY), an insurer with a high exposure to the exclusive Palisades neighborhood of Los Angeles, have lost 26% of their market capitalization, or $1 billion, analysts say.

The uncontrolled spread of the fire has tripled initial estimates of total damage, which now reach $150 billion.

The worst thing of all (from the stock market's point of view) is that the financial market has not yet fully absorbed the consequences of this disaster. Kobeissi's bulletin anticipates that smaller insurers could face bankruptcy, while many other corporations are at risk of insolvency.

Domino effect on the economy

The economic consequences are not limited to the insurance sector. Electric companies, which have been blamed for the disaster because of their transmission lines, face a financial threat of $9 billion.

The memory of PG&E's bankruptcy in 2019, after the Camp Fire, resurfaces as a possible scenario for other companies involved.

This domino effect could downgrade numerous corporate bonds to junk status, increasing instability in financial markets.

Correlation with bitcoin

Bitcoin (BTC), often perceived as a risk asset , tends to mirror the movements of traditional markets.

Its growing adoption by institutions and investment funds makes it vulnerable to the same macroeconomic factors that affect other financial assets.

Therefore, if investors take a more conservative approach in the face of economic uncertainty, bitcoin is likely to experience downward pressure similar to that of tech stocks.

At the moment, the digital currency has fallen by 3.39% in the last 24 hours and is trading at $91,038.69 at the time of writing.

In addition, the potential collapse of insurance companies and power companies could disrupt the flow of capital into assets considered safer (i.e., Treasury bonds), diverting attention away from bitcoin and other cryptocurrencies.

However, factors such as Donald Trump's inauguration in the United States on January 20 may act as tailwinds for the digital currency in the coming days.

Trump promised during Bitcoin 2024 to create a BTC strategic reserve if he won the election. Source: Investopedia.

An uncertain outlook

With less than 20% of the fire contained and economic damage growing exponentially, the impact of this natural disaster could extend to every corner of the economy.

Bitcoin, as a reflection of the global financial market, is no stranger to these dynamics and could suffer the consequences of an increasingly volatile economic environment.

Although the Los Angeles fires are geographically localized, their effects have the potential to be amplified on a global scale, demonstrating once again how regional crises can impact assets that transcend borders.