The market of cryptocurrency is volatile and it is bouncing up and down. However, those who have not invested in BTC (Bitcoin), should they be concerned? What will happen to the ‘normal’ financial markets if cryptomarket continues to soar in popularity? Keep reading to know if the cryptomarket poses a threat to the financial markets.
There has been umpteen debates on whether cryptocurrencies are systemically important, meaning if they are a threat to the broader financial market or not.
Bitcoin, as well as, the other cryptocurrencies are quite tiny in theory. So, it does not cause any systemic risk in case the company’s share prices plummet. The cryptomarket is seen as just another sector that is affected by the highs and lows, just like any other industry.
Experts Speak in Favour of Cryptocurrency
The main point of debate focuses on the extent to which investors have borrowed in order to invest in cryptocurrencies. A certain section of financial experts are of the opinion that being just 600 billion worth, it has very little to threaten the existing financial market (http://fortune.com/2017/12/20/bitcoin-systemic-financial-risk/). In the event that the Bitcoin prices drop to‘0, any time in the future, the loss will be close to a fall of 0.6% in US equity prices (https://btcmanager.com/will-bitcoin-collapse-spillover-effect-stock-market/).
According to some connoisseurs, as of now, cryptocurrency holdings are not interconnected systemically. This reduces the likelihood
of the financial crisis that may be caused by the mortgage-backed securities.
Cryptocurrency, however, has the power to bring a downfall of the present financial system. This can happen only when the currencies issued by the central banks become extremely unstable. Thus, it can be concluded that the massive use of cryptocurrencies would only be the outcome of instability and not the cause.
Views Objecting to Cryptocurrency
# But, what matters most is the amount of leverage based on it, as it is via leverage that the financial system can be impacted.
# Another problem with bitcoins is that it has become totemic. People aged between 20 to 50 are seduced by the attractive returns and are investing in the financial markets. The key reason behind this sudden rise in investment is simply the craving for quick money.
# The impact of cryptocurrency is not direct. Its side-effects may well drag to the future because people usually do not invest in stock markets and most of it is kept as cash. As a result, you are left with less asset during the time of inflation. In the event that a new generation of investors find Bitcoin to be the first step to financial market, they will happily get back to cash, affecting their long-term wealth.
The problem is not with Bitcoin. Rather, the problem is that when the valuations of stock market rise, investors get a reason to worry and get anxious, and eventually sell out. A crucial sell-off in Bitcoin may be cause behind a huge impact.
What is reassuring in here is that while a Bitcoin sell-off may cause investors to assess some of the excessive valuation in the market, such hugh values are not going to be universal. Some experts believe that on an average, a market cycle is 7 to 8 years in length. The history of economics suggests that the cryptomarket may take 15 to 20 years to reach the tail-end of a bubble. (https://www.forbes.com/sites/cherryreynard/2017/12/31/is-bitcoin-a-risk-to-wider-financial-markets/2/#6cc2cc10f364)
Several people trade a highly volatile asset based on speculation.
- They borrow money
- They risk systemic impact
Can Bitcoin Collapse Affect the Market?
A crash in the price of digital currency could easily pass on to the broader market. 2017 began with a 1,000 plus since 2013 (https://btcmanager.com/will-bitcoin-collapse-spillover-effect-stock-market/). In spite of this, most investors would have trouble believing that the dollar valuation of Bitcoin would enhance by over a thousand percent in the coming months.
It is true that nascent investors are enjoying the sudden rise in Bitcoin. But, sceptics believe that what is visible now is just a bubble, that will sooner or later burst. This is one of the prime reasons why several financial institutions are not ready to invest in digital currencies.
Some forecasters are foretelling that a burst in value can cause a damage of unprecedented level in the stock market. They opine that the wild run of Bitcoin is directly proportional to the outcome of its fall for the stock market.
Bitcoin leveraging will not create a systemic crisis. However, it does have the potential to do so. Whether you are into Bitcoin or not, all historic bubbles have these features in common, though some of them ended well. So, only time will tell how Bitcoins are going to affect the existing financial market.