Understanding of systemic risk in financial markets: the risks of cryptocurrency
The ascent of the cryptocurrency has made significant changes to financial markets, with its decentralized and peer-to-peer nature that attracts many investors. However, despite its growing popularity, cryptocurrency also aroused concerns about systemic risk. In this article, we will deepen the concept of systemic risk in financial markets, including the risks associated with cryptocurrencies.
What is the systemic risk?
The systemic risk refers to the potential for a widespread and interconnected crisis that could have catastrophic consequences for the entire financial system. It implies multiple factors that come together to create a system collapse, often triggered by a single event or combination of events. In financial markets, systemic risk can derive from various sources, including market volatility, credit risk, liquidity risks and the risk of counterparty.
types of systemic risk
There are different types of systemic risk that can affect financial markets, including:
- MARKING RISK : This type of risk derives when a specific investment or industry experiences a drop in value due to external factors such as economic recessions, market fluctuations or regulatory changes.
2
- Risk of liquidity : This type of risk derives when it is not enough liquidity in the financial markets, making it difficult or expensive to buy or sell activities quickly enough.
- Risk of counterpart : This type of risk involves the potential loss of value due to the failure of a counterpart to fulfill its obligations.
cryptocurrency and systemic risk
The ascent of the cryptocurrency has highlighted concerns about systemic risk in financial markets. Here are some reasons why:
1
- Risks of liquidity : The lack of regulation and supervision in the cryptocurrency space can make it difficult for investors to access or sell their activities quickly quite, increasing the risk of liquidity.
- Risk of counterpart : The decentralized nature of cryptocurrency transactions means that there is no central counterpart (CCP) to act as a reliable intermediary between buyers and sellers.
- Mercato concentration : the global cryptocurrency market has become increasingly concentrated, with larger actors dominating space. This concentration can create systemic risks if one or more of these players experience a crisis.
Examples of the real world
Several high -profile examples have highlighted the risks associated with cryptocurrency:
- 2017 collapses of the cryptocurrency market : a significant drop in the price of Bitcoin has led to a huge sale, causing losses for investors and interrupting markets all over the world.
2
- 2020 Bitcoin Flash Crash : a sudden increase in Bitcoin prices led to a rapid correction of the market, causing significant losses for investors.
Mitigation of systemic risk
To mitigate the systemic risk associated with cryptocurrencies and other financial instruments, the regulators have implemented various measures:
1
2
3.