Bitcoin is not “too big to fail,” but it could still disrupt the global monetary system if it collapses. At least, that’s the viewpoint shared by a popular economist.
Earlier this week, Mohamed El-Erian, Chief Economic Adviser at German multinational financial services company Allianz, gave his take on crypto-based investing. The economist told CNN,
“From a narrow perspective, it’s not too big to fail; from a broader perspective, that would be another challenge to the liquidity paradigm, where investors simply bet on liquidity.”
It must be noted, however, that El-Erian was quick to acknowledge the “massive distortion” which arose from the subdued nature of certain asset markets. The Federal Reserve System lowered the interest rates which led to the high prices of government bonds. Hence, making those bonds a less attractive option for investors looking to mitigate risk and diversify their portfolios.
The usual retreat asset, gold, has also experienced difficulties, something that has driven investors to Bitcoin. Despite the cryptocurrency’s volatility, some investors see it as “the least bad asset to use,” El-Erian said.
The economist did share a word of caution with all existing investors, as well potential investors though. El-Erian suggested that while private sector adoption of Bitcoin will continue, the future role of governments allowing Bitcoin to thrive might be called into question too.
For instance, most recently, 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 failing could lead to another liquidity-related accident and cause disruption to the global monetary system. He pointed out,
“There have already been three near-accidents this year, and it’s unclear which little fender bender is going to cause a pile-up on the highway. While there’s plenty of liquidity sloshing around the system, excessive and irresponsible risk-taking is being encouraged in certain areas.”
El-Erian finally spoke about the type of investors encapsulated by Bitcoin – all of which should concern central banks.
- The first are those investors that “truly believe Bitcoin will become money,” El-Erian said, adding that “If you’re a central bank and you have a monopoly over money, that’s not very reassuring at all”
- Second are those that could be described as negative investors. “They’re being pushed out of everything else and pushed into Bitcoin. It’s like being pushed into a marriage,” El-Erian said
- The last investor type is the traditional pure speculator. Those that make a bet on Bitcoin in the hope of larger profits down the road. “Where else do you get 20% returns or losses in a single day?”