Tuesday, June 22, 2021
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Crypto will cause the next financial crisis


  • Cryptocurrency will cause the next financial crisis according to a precious metals company CEO.
  • His worries are with the systemic risks from the mass investment into an asset class that has no intrinsic value.

Cryptocurrencies have, since going mainstream, faced a series of criticisms. One of them is the threat they pose to the financial system. The latest reminder of Bitcoin destabilizing the financial system comes from the Metalla Royalty and Streaming CEO Brett Heath. According to him, crypto will cause the next financial crisis.

In a recent interview, Heath questioned the amount of liquidity that has flowed into the crypto market since the beginning of 2020. According to him, cryptocurrencies are licenses for the private sector to print money. 

Heath compared the crypto market to the previous induced crashes like the Tulip Mania (1637), Credit Crisis (1772), Stock Crash (1929), OPEC Oil Crisis (1973), Asian Crisis (1997 – 1998), and the Global Financial Crisis (2007 – 2008). According to him, they all have something in common. 

When you look back at the last few decades and you look at all of the financial crises that happened, you know, they all have a couple of things in common. And one of them is the mass adoption of a new financial product or a new technology that’s not very well understood.

In addition, Heath stated that the mass adoption of mortgage-backed securities, collateralized debt obligations in 2008 became a problem after people had embraced it as a new financial product.

The United States M1 and the total crypto liquidity speaks a lot

According to the precious metals CEO, the M1 – total liquidity in circulation – has surged by four and a half times since the beginning of the year. Between January 2020 and April 2021, the M1 increased from $4 trillion to almost $18 trillion. This is even recognized as an incredible run in such a short period. However, the total cryptocurrency market cap has increased by over tenfold which is not normal. 

His worries are with the systemic risk from the mass investment into an asset class that has no intrinsic value. According to him, when a sell-off is triggered by any major factor as in the previous asset crisis, there will be a significant repercussion on the financial system. 

The crypto market could go upwards of $3 trillion, $ 4 trillion, $5 trillion…you just don’t know how high it goes. But when you have that amount of capital wiped out of digital wallets across the globe, you better believe there are going to be some significant financial repercussions.

Another concern is emerging new cryptos with similar attributes but no uniqueness. According to him, such assets will be the main casualties when there is a sector meltdown. However, some cryptos would resist and dominate like Google during the tech meltdown. 

In 2017, Garrick Hileman, an economic historian at the University of Cambridge also predicted that cryptocurrency could pose a systemic risk to the financial system when it becomes systemically important. 

 





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