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When Bitcoin Bubble Bursts, The Effects Will Be Minimal - Capital Economics

Kitco News

(Kitco News) - The bitcoin mania, with prices still in a parabolic rise, is adding to worries about what will happen when the bubble finally pops.

In a recent report, Andrew Kenningham, chief global economist at Capital Economics, said that he doesn’t see any systemic risk to the global economy or financial markets when the cryptocurrency finally bursts.

He described the bitcoin bubble more as a “curiosity” than a major risk.

“Unlike the bubbles in the tech sector in the late-1990s and in U.S. residential property a few years later, a bursting of the bitcoin bubble should not have systemic, macroeconomic implications. The total value of bitcoin is too small, and it has few links with the wider economy,” he said.

Kenningham, noted that the digital currency, despite its unprecedented rise, has a current market cap of around $240 billion, however that is a drop in the bucket compared to gold, which is valued at $8 trillion.

“If the price of bitcoin fell to zero today, the paper losses would be equivalent to a 0.6% fall in U.S. equity prices,” he said.

The one area that could be hit in a collapsing market would be household spending, as people deal with their investment losses. However, even this could be limited, he said.

“There is no evidence that people are taking out huge, sub-prime mortgages to finance their speculation in cryptocurrencies,” he said.

While bitcoin is seen as an alternative to the U.S. dollar, Kenningham said he sees that as an unlikely scenario.

“But we doubt that any cryptocurrency will become a serious rival to the dollar or other major fiat currencies, many of which have centuries of history behind them and the backing of governments and central banks,” he said. “And even if cryptocurrencies in general have a future, one of bitcoin’s numerous competitors, or a central bank digital currency, could kill it off just as plenty of early rivals to Facebook and Google were sunk without trace.”

Bitcoin has garnered massive media attention this week as prices continue to surge. Kitco.com’s aggregated charts show that prices, continues to trade at a record high at $17,100, up more than 1,600% so far this year.

While many see the cryptocurrency as a bubble, they note that it is impossible to determine just how high the prices could go before a crash.

The frenzy in bitcoin has now reached a fever pitch as it takes its initial steps into the mainstream financial markets with Sunday’s launch of the Cboe cash-settled futures contract.

According to reports, bitcoin futures at one point during its first trading session was up more than 20%, with the volatility triggering market circuit breakers along the way. However, prices have since stabilized modestly with gains of more than 10% Monday.

Next week the CME Group will join the bitcoin part with the launch of its cash-settled futures contract.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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