Understanding the systemic risk in financial markets: the risk of cryptocurrency

The rise of cryptocurrency has brought significant changes in financial markets, with its decentralized nature and point to point attracting many investors. However, despite its growing popularity, cryptocurrency also caused concerns about systemic risk. In this article, we will delve deeper into the concept of systemic risk in financial markets, including the risks associated with cryptocurrencies.

What is systemic risk?

Systemic risk refers to the potential of a widespread and interconnected crisis that may have catastrophic consequences for the entire financial system. It involves several factors joining to create a collapse throughout the system, usually triggered by a single event or combination of events. In financial markets, systemic risk may arise from various sources, including market volatility, credit risk, liquidity risks and risk of counterpart.

Systemic risk types

There are several types of systemic risk that can affect financial markets, including:

• Market Risk : This type of risk arises when a specific investment or sector experiences a decline in value due to external factors such as economic decelerations, market fluctuations or regulatory changes.

• Credit risk : This type of risk involves the potential loss of capital due to the default or insolvency of a borrower or issuer, usually triggered by changes in credit conditions.

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• Risk of counterpart

  : This type of risk involves the potential loss of value due to the failure of a counterpart to fulfill its obligations.

cryptocurrency and systemic risk

The rise of cryptocurrency highlighted concerns about systemic risk in financial markets. Here are some reasons for:

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• Liquidity risks : Lack of regulation and supervision in the cryptocurrency space may make it difficult to access or sell their assets quickly sufficiently for investors, increasing the risk of liquidity.

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• This concentration can create systemic risks if one or more of these players suffer a crisis.

Real world examples

Several high profile examples highlighted the risks associated with cryptocurrency:

• 2017 Crypto Market Cholape : A significant decline in the price of Bitcoin led to a massive sale, causing losses to investors and interrupting markets worldwide.

• 2018 Venezuela Crypt Crashe : The Venezuelan government’s attempt to prohibit cryptocurrencies was received with widespread criticism, leading to a sharp decline in the value of assets such as bits.

• 2020 Bitcoin Flash Crash : A sudden increase in bitcoin prices has led to a quick market correction, causing significant losses to investors.

Mitigating the systemic risk

To mitigate the systemic risk associated with cryptocurrencies and other financial instruments, regulators implemented various measures:

• Regulatory structures : Governments and regulatory bodies have established guidelines and regulations to supervise cryptocurrency development.

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