The sharp fall in crypto prices took many people by surprise. Questions not asked in a while quickly became hot topics. The hottest topic however, was about the fate of cryptocurrencies in the event of another financial collapse.
The trade war on the horizon, market crises in Argentina and Turkey and Deutsche Bank’s troubles all give a rise to many “what if” questions. A market crash will eventually come and how prepared will investors actually be?
The first signs of an impending market crash
To add more fuel to the fire, the Federal Reserve and other central banks are tightening their monetary policy. This will stop the gains which the near zero interest rates and endless money print… *cough* quantitative easing gave global markets since the last financial collapse. Usually a collapse like the one in 2008 requires a catalyst and there are many risk factors already at play.
The upcoming financial collapse will be the first one which cryptocurrencies will have to face. In 2008-09 cryptocurrencies weren’t in the spotlight. This means, when there were armies of scared and angry people with everything on the line, they couldn’t seek refuge with cryptocurrencies. Now mainly Bitcoin and Ethereum are largely recognized as alternatives to the traditional “safety” assets like gold and silver. There are two main scenarios which can unfold:
Depending on the scale and intensity of the situation, cryptocurrencies can remain unaffected by future policy reponses. If they manage to avoid draconian measures such as the Cypriot bank deposit freeze of 2013, they would become digital safe havens. This respectfully means their price will absolutely skyrocket.
The alternative is that cryptocurrencies can just prove a far too risky investment for most people. They will be swept together with all the other sectors. 2017 saw the biggest gains in crypto prices, but they were linked the great “risk on” uptrend, which was seen in stocks, emerging market-assets and commodities. In the same way, a huge selloff could ravage these markets.
The eventual market crash will reshape investing
Most people invest on crypto, money they can afford to lose. This is seen by almost everyone as a high-risk asset. During the event of a collapse, this type of investment is usually the first one cashed out as investors are scrambling in fear. Compared to last year crypto token markets are worth 3 times more than this time last year, roughly around $300 billion.
This is a drop in water, since it’s less than 1% of the total market cap of $54.8 trillion for the S&P Global Broad Market Index. The most panicked investors will be looking for safe things to buy. Others something very quick to dump can unbelievably fast swing the markets both ways.
No one actually knows how things will unravel in the event of another crisis. Like I mentioned above, this will be the first test of cryptocurrencies in a financial crisis. In the aftermath a lot of things will become clear and many investors will have far clearer paths for the future.
It became evident in the 2013 Cypriot crisis that the governments and banks will not hesitate to decline citizens access to their own funds. A smart person will take that as a harsh lesson and will take the appropriate measures for the future. Only time will tell how things will certainly unfold, but that doesn’t stop us from being a few steps ahead.
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