Does the crash of bitcoin and other cryptocurrencies threaten the financial system?

Does the crash of bitcoin and other cryptocurrencies threaten the financial system?

Hard to pass. Bitcoin (BTC) fell below thirty thousand euros. What will be the consequences for the financial system? Almost sixty thousand euros were spent six months ago in November 2021, the queen of cryptocurrencies has been falling steadily ever since. For a week, it’s free to fall. On Thursday May 12, 2022 this morning, bitcoin (BTC) even dropped to twenty-five thousand euros before rising again the same day to twenty-seven thousand euros. Other cryptocurrencies as a whole lost nearly $ 8 trillion in market value over the months of April and May 2022. According to the data site CoinMarketCapinvestors are worried about this fall in the cryptocurrency market.

Weaker market than its traditional counterparts

We have already mentioned above that, in November 2021, the world’s most popular currency, bitcoin (BTC), had reached 68,000 dollars, or almost sixty thousand euros. This peak pushed the value of the cryptocurrency market to three trillion dollars according to the site CoinGecko. By Tuesday, May 10, 2022, that figure had dropped to a trillion and a half dollars. Or a collapse of half of the cryptocurrency market … Of this total, bitcoin accounts for almost $ 600 billion, followed by Ether (ETH) for $ 285 billion. However, these astronomical sums are relatively small compared to other financial markets. For example, US stock markets are worth forty – nine trillion dollars.

A market held by a minority of people

A handful of people keep most of Bitcoin and ether in circulation. October report from National Bureau of Economic Research (NBER) indicates that tens of thousands of bitcoin investors, both individuals and entities, control about one-third of the bitcoin market, and that one thousand investors own about 3 million bitcoin tokens. We also know that institutional investors account for fifty percent of the assets of Coinbase platform, the largest cryptocurrency exchange in the world. Significant numbers indicate that the fall in BTC could have an impact on traditional investment entities and therefore on more traditional markets.

A cryptocurrency crash could be dangerous for the financial system

While the overall cryptocurrency market is relatively small, the U.S. Federal Reserve, the Department of the Treasury and the International Financial Stability Board have reported. stable tires(digital products added to the value of traditional assets) as a potential threat to financial stability.

Problem of stable tires for the financial system

The IS stable tires used primarily to facilitate exchanges of other digital assets. They are backed by assets that may lose value or that may be illiquid in the event of market stress, and the rules and information associated with those assets and the redemption rights of investors are unclear. Regulators have argued that this could put stable coins at risk of losing investor confidence, especially during market stress.

The TerraUSD case

And so it happened on Monday, May 9, 2022. The TerraUSD, one of the main ones stable tires, her peg broke to the dollar and dropped to zero sixty seven dollars. This movement also partly contributed to the fall of bitcoin. While TerraUSD maintains its connection to the dollar through an algorithm, the rush of investors on the stable tires holding reserves in assets such as cash or commercial paper could undermine the traditional financial system, putting stress in those underlying asset classes, regulators say.

But regulators are still divided globally over how big a cryptocurrency crash could be for the financial system and the economy in general. One thing is for sure: the links between crypto and traditional markets are becoming closer, and will continue to do so in the long run. At present, it remains difficult to predict whether or not this collapse will have a significant impact on the economy.

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Gregory Morat

A student passionate about entrepreneurship and interested in the technologies behind cryptos! Yes, I’m convinced that the two are closely linked: blockchain and NFTs are revolutionizing many sectors and presenting unprecedented opportunities.

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