Despite the recent week’s sharp drop, Bitcoin’s price is still up more than 250% compared to the last 12 months.
The issue of volatility in the cryptocurrency market is likely to persist, and as the price of bitcoin plummeted last week, more and more people are beginning to wonder whether cryptocurrencies are “contagious,” that is – whether the instability and price volatility of cryptocurrencies The answer to this “contagion” question is no if considered narrowly, but in a broader market context, especially given the assets, ownership and market functions, the situation may become more complex. However, in a broader market environment, especially considering asset, ownership and market functions, the situation may become more complex.
Below, we’ll take a look at four cryptocurrency “contagion” issues that investors need to consider.
First: Will cryptocurrency volatility continue?
Yes, cryptocurrency volatility is here to stay, and it’s going to get more intense and multidimensional. One of the notable developments in the cryptocurrency (and especially Bitcoin) industry this year has been the emergence of competition between the private and public spheres, which is likely to intensify in the coming months.
Just recently, however, it appears that the private sector has begun to accelerate the self-reinforcing process, with many companies beginning to explore bitcoin as a payment method and store of value, with the most notable “push” occurring in February of this year when Elon Musk announced that Tesla had invested some of its funds in bitcoin. And it was also announced that Bitcoin would be added as a payment option for vehicle purchases. Such a move could easily lead other companies to follow suit, which would in turn push bitcoin higher and attract more investors. At the same time, non-traditional cryptocurrency trading platform providers are beginning to accelerate their growth, such as Coinbase’s successful landing on the NASDAQ exchange, and more traditional brokerage service providers looking to provide interested investors with investment vehicles to participate in the crypto market.
Elon Musk and Tesla’s “crypto enthusiasm” seemed unstoppable, but just last week, the momentum faltered as regulators from the public sector began to push back.
Many regulators and central banks remain concerned about the risks cryptocurrencies pose to national security as well as economic and financial stability, and for regulators, their top long-standing concerns about cryptocurrencies include illegal payments, investor protection, weakening the effectiveness of monetary policy, and, more importantly, the potential for widespread issuance and use of competing currencies to affect their own legal tender.
Now, some large countries with significant international demonstration roles, such as China and the United Kingdom, are seriously examining the feasibility of central bank digital currency issuance, and as soon as more progress is made on central bank digital currencies, more regulatory pressure will be put on decentralized currencies (such as Bitcoin) so that they can make room for their own digital currency issuance.
Second: Is there a strong “formal link” between cryptocurrencies and more traditional asset classes?
In general, there is no strong “formal link” between cryptocurrencies and more traditional asset classes. At least for now, they tend to live in their own ecosystems.
By their fundamental properties, cryptocurrencies are neither a substitute for stocks, bonds and commodities, nor for other financial assets. While proponents have been emphasizing the role of “cryptocurrencies” as a decentralized global currency with the ability to proliferate rapidly in the payments and savings ecosystem, there are two necessary conditions for this to happen.
- a mature system.
- a relatively stable price.
Achieving both of these will typically take several years to accomplish. Not only that, but cryptocurrencies will have to find solutions to deal with the high energy consumption problem.
Third: Is there an informal “contagion path” between cryptocurrencies and traditional financial assets?
There are undeniably some informal “contagion pathways” between cryptocurrencies and traditional financial assets, and these informal “contagion pathways” are starting to grow, especially with the addition of leveraged trading.
With traditional bonds offering poor yields and an asymmetrical and less favorable price outlook, some investors have come to see cryptocurrencies as a good way to diversify their asset risk, resulting in a number of equity-like crypto exposures, and some investment institutions are choosing to invest in crypto platforms as part of their portfolio positioning.
As more investors cross “holdings” in their portfolios continue to expand, the “contagion” risk of cryptocurrencies is increasing, especially when leveraged transactions are used, and the operational infrastructure supporting cryptocurrency trading has to be put under some pressure –As happened last week, many of you will have seen something wrong. It is important to note that historically, the “contagion” issue has been rife with examples of many investors selling assets for three main reasons.
- to protect their overall portfolio.
- to raise capital.
- To do both.
However, in many cases, investors are often unable to sell the products they want to sell, and end up selling assets that are far different in nature from the assets they expect to sell, which can lead to higher financial spillover risk.
Fourth: How “contagious” is the risk of cryptocurrencies?
If cryptocurrencies operate in a closed-loop format, the risk may not be too great, but it could get worse if other correlated events occur in the market.
At this stage, institutions do not yet fully hold bitcoin, which means there is no systemic risk yet. Many banks also do not appear to have (or hardly have) added cryptocurrencies to their balance sheet exposures. From this perspective, it is good news that cryptocurrency market volatility does not have direct spillover effects on other sectors (especially the financial sector).
On the other hand, while the price of bitcoin has fallen from $63,000 to under $40,000 in the last five weeks, it has still risen by more than 250% if you look at the last 12 months. Not only that, but the Federal Reserve is providing ample and predictable liquidity, so some industry analysts believe there is still “rally potential” for bitcoin, in which case the risk of cryptocurrency “contagion” could expand even further.
Therefore, market participants and financial regulatory authorities must pay close attention and monitor the potential risk of a financial incident, especially now that people are traveling faster and faster on the financial risk highway.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/bloomberg-will-bitcoins-plunge-contagious-to-other-financial-assets/
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