Bitcoin is not ‘too big to fail’, but could still disrupt the global monetary system if it collapses. At least that’s the view shared by one popular economist.
Earlier this week, Mohamed El-Erian, chief economic advisor at German multinational financial services company Allianz, gave his views on crypto-based investing. The economist told CNN,
“From a limited perspective, it’s not too big to fail; from a broader perspective, that would be a new challenge to the liquidity paradigm, where investors simply bet on liquidity.”
However, it should be noted that El-Erian was quick to acknowledge the “huge disruption” resulting from the subdued nature of certain asset markets. The Federal Reserve System lowered interest rates, leading to the high prices from the government bonds. This makes these bonds a less attractive option for investors looking to limit risk and diversify their portfolios.
The usual retreating asset, gold, has also encountered difficulties, something that has driven investors to Bitcoin. Despite the cryptocurrency’s volatility, some investors consider it “tHe is the least bad asset to use”, said El-Erian.
The economist shared a word of caution to all existing investors, as well as potential investors. El-Erian suggested that while private sector adoption of Bitcoin will continue, the future role of governments will increase allow Bitcoin to Thrive can also be questioned.
Most recently, for example, the Chairman of the Monetary Authority of Singapore said this week that cryptocurrencies are “not suitable for retail investors” due to their high volatility.
The veteran also said that Bitcoin’s failure could lead to it another liquidity-related accident and cause disruption to the global monetary system. He pointed out,
“There have already been three near misses this year and it is unclear which little fender bender will cause a pile-up on the highway. While there is sufficient liquidity flowing through the system, excessive and irresponsible risk-taking in certain areas is encouraged.”
Finally El-Erian spoke about the types of investors encapsulated by Bitcoin – all of which should concern central banks.
- The first are the investors who “really believe that Bitcoin will become money,” El-Erian said, adding: “If you are a central bank and have a monopoly on money, that is not very reassuring at all.”
- Secondly, there are the investors who can be described as negative investors. “They’re being pushed out of everything else and into Bitcoin. It’s like being forced into a marriage,” El-Erian said
- The final investor type is the traditional, pure speculator. Those who take a chance on Bitcoin in the hope of bigger wins down the road. “Where else can you get a 20% return or loss in one day?”
