What does Bitcoin’s volatility mean for other assets?
With cryptocurrency volatility likely to persist – Bitcoin alone traded in a range of $ 30,000 to $ 44,000 last week – more and more people are wondering if this will cause problems for other financial assets like than stocks and bonds. The answer to this “crypto contagion” question, if taken narrowly, is no. This becomes more complicated in the larger market context, however, especially due to cross-ownership of assets, leverage and how the market works.
Here are four contagion questions investors should consider:
Will crypto-volatility continue?
Yes. The likely persistence of volatility is due to an arm wrestling that will become more tense and multidimensional.
A notable aspect of cryptos this year, and Bitcoin in particular, has been the competitive pull between and within the private and public sectors. This phenomenon is likely to intensify in the coming months, each part also going through its own evolution which is far from linear.
Until the last 10 days or so, the private sector was fueling what appeared to be an accelerated self-reinforcement process of wider adoption of Bitcoin as a form of payment and store of value. The most visible impetus came in February, when Elon Musk announced that Tesla had invested some of its money in Bitcoin and would also accept it as payment for cars.
This has encouraged other companies to follow suit, pushing Bitcoin prices higher and attracting more investors. With the prosperity of non-traditional crypto trading platform providers, like Coinbase’s direct listing on the Nasdaq, more traditional brokers have sought to participate by providing their own vehicles to interested investors.
That seemingly unstoppable momentum was shaken last week, not only by doubt over Musk and Tesla’s continued enthusiasm, but also by the escalating and expanding public sector crackdown.
Many governments and central banks remain concerned about the risks that cryptos pose to national security and economic and financial stability. Long-standing concerns have focused on the facilitation of illicit payments, weak investor protection, the potential to erode the effectiveness of monetary policy, and the loss of seigniorage that accompanies the widespread issuance and use of foreign currency. competing.
Several countries, including some large ones with strong international demonstration effects such as China and the UK, are now looking more seriously at the central bank’s issuance of digital currencies, or what some see as centralized cryptocurrencies. The more they advance in this area, the more inclined they will be to make room for their own digital currencies by exerting regulatory pressure on the attractiveness and viability of decentralized variants such as Bitcoin. Indeed, this may well be a motivation behind China’s recent anti-Bitcoin actions.
Is there a strong formal link between crypto and more traditional asset classes?
Overall, no. They tend to live in their own ecosystems, at least for the time being.
Based on their fundamental attributes, cryptos are neither physical nor financial substitutes for stocks, bonds, and commodities. While their strongest supporters underscore their role as a decentralized global currency that will rapidly proliferate in payments and savings ecosystems, the ability to do so requires the kind of institutional maturation and relative price stability that it will take. years to establish. In addition, the cryptos will have to find a solution to the problem of high energy consumption.
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