How would the Crypto Market react in a Global Financial MeltdownJune 12, 2018
The notion of a financial meltdown, especially one that takes place on a global level is always a scary prospect. As previous cases clearly show, no one emerges completely unscathed from these events. Meltdowns like the crash of 1929 have world-changing consequences and their effects leave a permanent marker for at least a generation.
Often, they leave a legacy that is not positive by any stretch of the imagination, regardless of how long do they actually last and how fast does the recovery set in. Even during small and quick meltdowns, fortunes have been lost and many companies brought to bankruptcy.
Today, with the memories of the 2009 crisis still fresh in memory as well as in actual past, the problem of a potential meltdown continues. In fact, it can be argued that thanks to the unpredictability of the modern geopolitical system, the chances for an event like this have never been higher. After all, all the markets in the world hate surprise and rapid changes.
Yet, in the midst of a range of potential financial meltdown possibilities, the question for many in the crypto domain is how would cryptocurrencies fair in an event like this. Here is an overview of this issue and a range of fact that is related to the survivability and general outlook of digital currencies during a strong and sudden global financial crisis.
The Possibility of a Meltdown
The question is not an idle one for the crypto community and industry. Apart from the shaky geopolitical situation, there are plenty of purely financial and economic fires burning right now in the world. The Deutsche Bank problems, potential trade wars, Italian debt market are just some of the ones in the modern world. There are also additional localized ones, like the market crisis in Argentina and Turkey for example.
At the same time, central banks like the US Federal Reserve are signaling a tighter monetary policy. With this combination of factors, there is a constant chance of something triggering a movement in the global markets that would result in investors exiting markets and taking their money with them.
If this did occur, what would be the immediate effect on bitcoin and other digital currencies, large and small? Would that circumstance transform the crypto market into a safe haven that would then see a big inflow of money? Or would the panic selling be strong enough to encompass the digital currency domain as well – experience shows the twitchy crypto market does not take long to start to sell its assets.
Some crypto market participants, especially those who are holding their asset, would welcome a meltdown on the scale of 2009. These count on one of the essential pillars of bitcoin and all cryptocurrencies, as they are defined by Satoshi Nakamoto’s cryptocurrency that began it all.
For them, it is precisely crypto that can use the independence of the cryptocurrency to find a level of stability in a constantly changing reality. In fact, even outside of these circles, bitcoin is recognized today as a more versatile investment potential than the traditional safe harbor valuables, like gold.
This faction of the cryptocurrency ecosystem is certain that in any crisis, bitcoin would shine as a haven. The same should happen to many other cryptocurrencies, including zcash and monero. These are unscathed by monetary policies and immune from interventions like the deposit freeze of Cyprus in 2013.
In a purely digital age, these could offer a safe harbor for the capital of the fleeing investors who are being followed by a crumbling older traditional system. In theory, the moment they change their assets from fiat to crypto, their investment is safe from the drops of the meltdown taking place outside of it.
For the crypto bulls, this type of sudden buy-in would trigger an instant surge in price as the free crypto market reacts to the development. New investors coming to crypto is as great news, even if the traditional financial system is breaking into pieces.
A Risky Domain for Risk Takers
At the time of a meltdown, the crypto market could face a different challenge. In that eventuality, experience shows that a waste majority of investors button down the hatches and set into a long wait to outlast the storm.
This means that the markets lose the investors who are inclined to take risks. Here lies the problem – even in a total meltdown, the investors would still perceive bitcoin or other cryptocurrencies as a risky investment.
Essentially, a big selloff would likely spill-off in terms of psychology to the crypto markets as well. When the times turn sour, the high-risk investments are usually the first ones to get axed by their investors, who will likely be scrambling to get their hands on cash at that moment.
The bulls of crypto believe that the correlation between cryptocurrencies and risky mainstream assets is a clear example of their position. The two are in low correlation, meaning that statistically, they do not seem to move in any kind of tandem. There might be overlaps in behavior, but this does not imply a cause and effect connection.
Yet, many point out that the reason why in a previous couple of years the money flooded into crypto was the fact that it began appealing to mainstream investors. However, when and if its liquidity goes away, the very opposite thing could happen. In that case, the low correlation would have no relevance and the crypto would suffer just like any other form of value out there, except for the bastions of stability like the previously mentioned gold.
A Testing Ground
Oddly enough, a big financial meltdown would work great as a field test for cryptocurrency market’s ability to react to events like this. In some ways, the crypto is synced with the global markets and in others, it is completely disjointed from it.
In this regard, these two function in much of the same way as regular video games and eSports. During a crisis, everyone would get to see what effect could crypto have and what would be the effects of the crisis on the crypto space it in turn. This will be a fantastic learning opportunity, even though the price for the same lesson would be really steep.