Even though Bitcoin is not “too big to fail,” the collapse of the cryptocurrency could still have repercussions for the international monetary system. At least, this is the perspective that is held by a well-known economic expert.
In an interview earlier this week, Mohamed El-Erian, the Chief Economic Adviser at the German multinational financial services company Allianz, provided his perspective on investing in cryptocurrencies. CNN reported that the economist stated,
“From a limited point of view, it’s not too big to fail; however, from a broader point of view, that would be another challenge to the paradigm of liquidity, which states that investors simply bet on liquidity.”
However, it is important to note that El-Erian was quick to acknowledge the “massive distortion” that arose as a result of the subdued nature of certain asset markets. The interest rates were lowered by the Federal Reserve System, which is what caused the increase in the price of government bonds. As a result, investors who wish to reduce risk and broaden the scope of their portfolios will find that purchasing those bonds is a less appealing option.
Gold, which is traditionally seen as a safe haven asset, has also been experiencing challenges, which has encouraged investors to shift their focus to bitcoin. El-Erian stated that some investors consider cryptocurrency to be “the least bad asset to use” despite the fact that it is extremely volatile.
However, the economist did offer a word of warning to both current investors and those who might become investors in the future. El-Erian suggested that while adoption of Bitcoin in the private sector will continue, the role that governments will play in the future in allowing Bitcoin to thrive might also be called into question in the future.
For example, just this week, the chairman of the Monetary Authority of Singapore stated that cryptocurrencies are “not suitable for retail investors” due to the high volatility that they exhibit.
The seasoned trader also stated that the failure of Bitcoin could result in yet another accident that is related to liquidity and could cause disruptions in the global monetary system. He made the point that,
“There have already been three near-accidents this year, and it’s unclear which minor fender bender is going to cause a pile-up on the highway. There have been three near-accidents already this year. In some parts of the economy, excessive and irresponsible risk-taking is encouraged, despite the fact that there is a sufficient amount of liquid assets floating around the system.
El-Erian has finally addressed the various types of investors that are attracted to Bitcoin; all of these investors should be of concern to central banks.
El-Erian described the first group of investors as those who “truly believe Bitcoin will become money.” He continued by saying, “If you’re a central bank and you have a monopoly over money, that’s not very reassuring at all.”
The second group consists of individuals who are known as “negative investors.” “They’re being forced into Bitcoin at the expense of everything else,” the author writes. El-Erian compared the situation to being coerced into getting married.
The final category of investors to consider is the classic pure speculator. Those individuals who place a wager on Bitcoin in the expectation of greater gains in the future. Where else can you make or lose twenty percent of your investment in a single day?