Can Bitcoin Cause a Financial Crisis?

Bitcoin has undoubtedly gained popularity around the world. This is because some investors have lost faith in centralized banks. While Bitcoin’s growth is not necessarily problematic, it has prompted companies to invest in it. This means that this virtual currency could evolve into a systematic risk for the conventional financial system.

Today, a growing number of companies and financial institutions are investing in Bitcoin through platforms such as Bitcoin Code. Also known as crypto exchanges, these platforms allow individuals and institutions to purchase this virtual asset using fiat currency. As more and more people invest in Bitcoin, virtual currency could eventually become systematically important. And if that happens, this cryptocurrency could pose a systematic risk.

Why is a financial crisis happening?

People who have lived during a financial bubble know that the inability of the government to intervene appropriately is the cause. While the US economy may appear to be on the mend, the Fed may continue to absorb mortgage-backed securities and US Treasuries to the tune of $ 120 billion per month.

Although bond yields have been rising recently, they have also slipped and compared the ten-year Treasury yield from which most debt refers. However, this benchmark is lower than inflation. For the second time in four decades, the results are profoundly unfavorable, distorting asset prices and market incentives. Such situations leave the Fed with no choice but to provide more liquidity to the market.

The reluctance of the US Federal Reserve and the Hoover administration to intervene is making matters worse while unnecessarily prolonging the economic malaise. The Hoover administration has implemented a relief program. However, he refused to intervene directly in the economy.

At the same time, the Fed tightened liquidity, failing to support failing banks when the traditional financial system needed it most. This may explain why the Fed acted during the COVID-19 pandemic, as it could potentially cause more damage than the 2008 financial crisis.

Bitcoin on the rise

Currently, the world does not have enough people or institutions that hold or own Bitcoin. In addition, people and institutions have not used enough leverage or credit. However, experts are predicting a situation where Bitcoin becomes essential due to the government’s inability to intervene or prevent a financial crisis.

The value of Bitcoin has increased over the years. So far, the value of this cryptocurrency has increased by over 1000% against the US dollar. And it has sparked concern and interest among financial experts and investors.

For this reason, authorities in the UK and EU are considering a crackdown on Bitcoin amid growing concerns over their use to aid in money laundering and financial crimes. If another crash occurs, traditional banks will take a huge hit than they did in 2008, which led to the introduction of Bitcoin. Therefore, more and more people would adopt Bitcoin as a method of payment and storage of value.

Bitcoin could trigger the next crisis

Currently, an increasing number of financial institutions are entering the crypto space. Sign of change, more and more hedge funds are settling in this space. New investments like Bitcoin futures are also emerging.

Nevertheless, some experts claim that Bitcoin and other virtual currencies are not yet at risk because they are still too detached and too small compared to other financial markets. However, their growing integration with the traditional financial market is happening quickly. And that could potentially threaten stability while exacerbating the next financial crisis.

Essentially, Bitcoin allows people to break out of the traditional financial system and completely disconnect from it. And many people are considering this decision because of their waning confidence in conventional economic systems. Additionally, more and more people are rushing to own Bitcoin, believing it to be recession-proof and a hedge against inflation. These factors may seem minor now, but they could allow Bitcoin to trigger the next financial crisis.

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