Can Bitcoin Cause a Financial Crisis?

Bermix Studio on Unsplash/File
Photo by Bermix Studio on Unsplash

Bitcoin has undoubtedly gained increasing popularity worldwide. That’s because some investors have lost trust in centralized banks. Although Bitcoin’s growth isn’t necessarily problematic, it has enticed corporate institutions to invest in it. That means this virtual currency could evolve into a systematic risk to the conventional financial system.

Today, an increasing number of corporate and financial institutions are investing in Bitcoin via platforms like Bitcoin Code. Also called crypto exchanges, these platforms allow individuals and institutions to purchase this virtual asset using fiat money. As more people invest in Bitcoin, the virtual currency could eventually become systematically important. And if this happens, this cryptocurrency could pose a systematic risk.

Why Does a Financial Crisis Happen?

People that have been around during a financial bubble know that the government’s failure to intervene appropriately causes it. While the U.S. economy may seem on the mend, the Fed can continue soaking up mortgage-backed securities and U.S. treasuries to the tune of up to $120 billion a month.

Although bond yields have spiked recently, they also slipped down and benchmarked the ten-year treasury yield from which most debts take reference. Yet this benchmark is below inflation. For a second time within four decades, the outcomes are profoundly adverse, distorting asset prices and market inceptive mechanisms. Such situations leave the fed no option but to supply more liquidity to the market.

The U.S. Federal Reserve and the Hoover Administration’s reluctance to intervene worsens things while unnecessarily prolonging the economic malaise. The Hoover administration rolled out a relief program. However, it declined to intervene directly in the economy.

At the same time, the Fed restricted liquidity, thereby not propping up failing banks when the traditional financial system required them most. Perhaps, this explains why the Fed acted during the COVID-19 pandemic because it could potentially cause more damage than the 2008 financial crisis.

The Rising Bitcoin

Currently, the world doesn’t have enough people or institutions that hold or own Bitcoin. Also, people and institutions have not used sufficient leverage or enough credit. However, experts predict a situation where Bitcoin becomes essential due to the government’s inability to intervene or prevent a financial crisis.

Bitcoin’s value has increased over the years. So far, this cryptocurrency’s value has risen over 1,000% against the U.S. dollar. And this has raised concern and interest among financial experts and investors.

For this reason, authorities in the U.K. and E.U. are contemplating a Bitcoin crackdown due to the rising concerns over their use to aid money laundering and financial crimes. If another crash happens, traditional banks will experience tremendous backlash than they did in 2008, which led to the introduction of Bitcoin. Consequently, more people would embrace Bitcoin as the payment method and value storage.

Bitcoin Could Trigger the Next Crisis

Currently, an increasing number of financial institutions are entering the crypto space. As a sign of change, more hedge funds are moving into this space. New investments like Bitcoin futures are also emerging.

Nevertheless, some experts say that Bitcoin and other virtual currencies are yet to pose a risk because they are still too detached and too small compared to other financial markets. However, their increasing integration with the traditional financial market is happening rapidly. And this could eventually threaten stability while exacerbating the next financial crisis.

Essentially, Bitcoin enables people to exit the traditional financial system and disconnect from it completely. And many people are contemplating this move due to their declining trust in conventional economic systems. Additionally, more people rush to own Bitcoin, thinking it is recession-proof and a hedge against inflation. These factors might seem minor now, but they could enable Bitcoin to trigger the next financial crisis. 

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