How Cryptocurrencies Could Trigger A Financial Crisis

The crypto market continues to witness exponential growth with little to no regulations.

The market is decentralized and has low entry-level requirements for investors.

Some experts believe that cryptocurrencies could trigger a financial crisis.

The economy will suffer a meltdown and collapse if a financial crisis occurs.

Some pointers to a financial crisis include a decreased GDP, increased debt rate and unemployment, etc.

Due to past occurrences, for instance, the 2008 housing crisis that led to the financial crisis in the US, the crypto market is currently following the same pattern.


The exponential growth and widespread acceptance of cryptocurrencies are a concern to experts.

Cryptocurrency is posting high numbers across the board, such as the total number of users, total number of coins and their respective market caps, total number of wallets, etc.

The crypto market is decentralized, and the entry requirement for acquiring blockchain digital assets is minimal. As a result, many investors are pulling their resources to acquire various cryptocurrencies.

When a sector in the financial system is growing fast in an unregulated space, it calls for significant concern and attention.

With the exponential growth of the cryptocurrency market, experts believe that it could trigger a financial crisis.

Blockchain apps are volatile and vulnerable to price corrections, and they have no regulatory body to balance the tide during a crisis.

A look at Bitcoin and Ethereum on the blockchain wallet shows that the two most considerable crypto assets plunged more than 30% between November 2021 and January 2022.

Many external factors are responsible for the drastic fall in the price and value of cryptocurrencies. Experts believe a financial crisis is imminent if significant cryptocurrencies continue to witness such sharp falls.

A look at the history showed a similarity between the housing mortgage market that caused the financial crisis in 2008 and the current trend in the crypto market.

It is expedient to identify what a financial crisis entails and the pointers to show an economy is heading towards a financial crisis.

What Is A Financial Crisis?

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The financial crisis is a severe economic meltdown. When an economy experiences a financial crisis, the prices of assets decline in value; financial institutions are faced with liquidity shortages, debts continue to increase, among others.

A financial crisis is characterized by a significant financial asset's sudden loss of value. It could be the crash of the stock market, currency crisis, real estate, or oil crash.

A financial crisis could occur in a sector like the banking industry whereby large numbers of depositors panic and withdraw their funds from the bank.

It could be a widespread/ nationwide financial crisis. This form of financial crisis affects all sectors of the economy in a nation.

Financial crises follow the same pattern, preceded by periods of economic boom as the crypto market is witnessing.

A popular example is the 2008 Global financial crisis. The 2008 Global financial crisis is a point of reference for this topic of discourse.

Experts opined that it is difficult to foresee a financial crisis. Most times, it is based on assumption and speculation.

In summary, the financial crisis mostly leads to economic recession, and the crisis leads to a decline of the country's Gross Domestic Product (GDP) by 50%.

Let's look at how experts believe that cryptocurrencies could trigger a financial crisis.

How Cryptocurrencies Could Trigger A Financial Crisis

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The cryptocurrency market witnessed a growth rate from $16 billion to $2.3 trillion in five years. Experts say this exponential growth is likely to lead to a financial crisis.

The reason is that the subprime mortgage market in 2008 witnessed exponential growth before the global financial crisis. The same events before the 2008 global financial crisis occurred in the crypto market.

In addition, government agencies and regulatory bodies adopt cryptocurrencies as legal means of exchange.

It is essential to know that the crypto market is decentralized; the rise and fall of these assets' value are based on informal market forces. If the government wants to adopt blockchain assets, there should be a form of regulation.

Imagine an economy that adopts Bitcoin or ethereum as a legal form of exchange; at the onset, the cryptocurrency might experience an increase in price and value. However, when the price falls, it will directly affect such an economy and lead to a financial crisis.

While experts hold strong views that the cryptocurrency is too tiny and detached from other financial markets, they do not yet pose a risk of causing a financial crisis; these experts still want investors and financial regulators to be cautious of the growing crypto market.

Conclusion

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One of the main features of cryptocurrency lies in its instability. The crypto market is volatile, and the prices of coins are in constant fluctuation. We've seen many practical scenarios of this in the past, and we are currently in one with Bitcoin.

In less than 24 hours, the significant crypto assets hitherto gaining might plunge aggressively and vice versa.

The fact that the blockchain assets do not have regulations makes them volatile, and investors need to be wary. Experts believe that the crypto assets lack intrinsic value, making it easy for investors to run at a loss easily.

While it is difficult and takes a series of events for a financial crisis to occur, if the population of investors in the crypto market keeps increasing, a crisis in the market might affect the general economy.

It is, therefore, suitable for central banks and financial regulators to put measures in place to regulate the financial sector to avoid an imminent financial crisis.



Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute any investment suggestions.
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