Is Bitcoin A Risk To Wider Financial Markets?

It’s up, it’s down, it bounces all around. But what of those who are not invested in Bitcoin? Those who are looking forward to 2018 and wondering what will happen in ‘normal’ financial markets – does Bitcoin matter to them? Possibly.

There has been plenty of debate on whether cryptocurrencies are ‘systemically important’ – i.e. whether they pose a risk to wider financial markets if (when?) they crash. Garrick Hileman, an economic historian at the University of Cambridge says he ‘can imagine scenarios…where they do become systemically important”, while being clear that this is not his central thesis.

In theory, of course, Bitcoin and the other cryptocurrencies are tiny – it creates no systemic risk if one company’s share price slumps, in the same way it didn’t cause a problem when Provident Financial or Dixons Carphone saw savage falls earlier this year. Cryptocurrencies are just another sector, as vulnerable or invulnerable to highs and lows as any other.

Much of the debate focuses on the extent to which investors have borrowed to invest on cryptocurrencies. Richard Buxton, chief executive at Old Mutual Global Investors, says: “Bitcoin, of itself is too small to pose a systemic risk. However, it would depend on how much leverage there is based on it.” It is through leverage, via derivatives, that problems spread through the financial system.

read more at forbes.com

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