The continuing frenzy surrounding Bitcoin has a number of analysts and economists worried even as global financial institutions are starting to actively participate in the crypto world.
2017 has been a banner year for Bitcoin and other cryptocurrencies. Last week saw Bitcoin race from $14,000 to over $18,000 in a few hours before coming back down to earth at just over $15,000. While many financial experts are predicting that Bitcoin will soar even higher in 2018, there are a number who are a little more gloomy. The latest member of the Gloom Club is Torsten Slok, an economist with Deutsche Bank, who believes that a Bitcoin crash could endanger global markets.
Bitcoin Making the List … of Market Risks
Bitcoin has been riding high this year, and the launch of futures trading is driving interest to a fever pitch. The CBOE website actually crashed yesterday as it couldn’t handle the massive influx of traffic. One wonders if CME will beef up their site when they launch their own Bitcoin futures exchange next week.
Of course, not everyone is tickled pink by the increasing influence of Bitcoin and cryptocurrency. Torsten Slok of Deutsche Bank has issued a warning about the ramifications of a Bitcoin crash in 2018. Slok released a list of 30 market risks that could impact global markets, and a Bitcoin crash came in at lucky number 13. This places Bitcoin behind German wages and inflation but ahead of Brexit developments and the Russian presidential election.
How Bad Would a Bitcoin Crash Be?
A total Bitcoin crash would be devastating to a lot of people, but it may not have the global impact that Torsten Slok envisions. One such reason not to fret is that of scale. The total market cap for all cryptocurrencies is $436 billion at the time of this article’s writing. While a tremendous amount of money, it does pale in comparison to other economic factors. The housing market in the United States alone was estimated to be almost $30 trillion back in 2016. Another example of scale is that the value of all Japanese stocks hit a high of $5.49 trillion back in September.
Another reason why not to panic is that Bitcoin is spread across the world and not concentrated in a single economic block, such as Europe. A lot of people would lose a great deal of money in the event of a Bitcoin crash, but it should not throw a wrecking ball at a single country’s economy. However, if a Bitcoin crash was part and parcel of a greater financial breakdown across multiple markets, then the overall global market would be impacted.
That being said, a Bitcoin crash would hurt a lot of individuals, but I wonder if a lot of national governments would welcome such an occurrence. There’s no denying that many governments are not too keen on cryptocurrency as it is currency that lies outside their control, and governments are not thrilled with a lack of control.
As for Deutsche Bank, they’re calling for greater regulation and security on cryptocurrency in order to make it a viable asset class. The bank believes that the imbalance between supply and demand, as well as the volatility of crypto prices, make investing in digital currencies risky. Deutsche Bank says:
If cryptocurrencies are to replace money, then they have to fulfill money’s three core functions: as medium of exchange, a measure of value and a store of value. To do this, cryptocurrencies must be more trusted. Problems here include high volatility and possible price manipulation as well as data loss or data theft.
In the image below are the 30 global market risks as selected by Torsten Slok of Deutsche Bank.
Images courtesy of Bloomberg, Flickr, Pixabay, and LinkedIn.