Understanding Systemic Risk In Financial Markets
Understand the systemic risk in financial markets: the risks of cryptocurrency
The cryptocurrency emergence has made significant changes to financial markets, with their decentralized nature and the peers who attract many investors. However, despite its growing popularity, even cryptocurrency has aroused concerns about systemic risk. In this article, we will deepen the concept of systemic risk in financial markets, including the risks associated with cryptocurrencies.
What is the systemic risk?
The systemic risk refers to the potential of a generalized and interconnected crisis that could have catastrophic consequences for the entire financial system. It implies multiple factors that bind to create a collapse of the entire system, often triggered by a single event or combination of events. In financial markets, systemic risk can derive from different sources, including market volatility, credit risk, liquidity risks and the risk of counterparty.
types of systemic risk
There are different types of systemic risk that can affect the financial markets, which include:
- MARKING RISK : This type of risk derives when a specific investment or industry experiences a decrease in value due to external factors such as economic recessions, market fluctuations or regulatory changes.
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- Risk of liquidity : This type of risk arises when there is not quite liquidity in the financial markets, which makes it difficult or expensive to buy or sell activities quickly enough.
- Risk of counterpart
: This type of risk implies the potential loss of value due to the failure of a counterpart to fulfill its obligations.
cryptocurrency and systemic risk
The increase in cryptocurrency has highlighted concerns about systemic risk in financial markets. Here are some reasons why:
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- Risks of liquidity
: The lack of regulation and supervision in the cryptocurrency space can make it difficult for investors to access or sell their activities quickly quite, increasing the risk of liquidity.
- Risk of counterpart : decentralized nature of cryptocurrency transactions means that there is no central counterpart (CCP) to act as a reliable intermediary between buyers and suppliers.
- Mercato concentration : The global cryptocurrency market has become increasingly concentrated, with larger actors dominate space. This concentration can create systemic risks if one or more of these players experience a crisis.
Examples of the real world
Several high -profile examples have highlighted the risks associated with cryptocurrency:
- 2017 collapse of the cryptocurrency market : a significant reduction in the price of Bitcoin has led to a mass sale, causing losses for investors and interrupting markets all over the world.
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- 2020 Bitcoin Flash Crash : a sudden increase in Bitcoin prices led to a rapid correction of the market, causing significant losses for investors.
mitigate the systemic risk
To mitigate the systemic risk associated with cryptocurrencies and other financial instruments, regulators have implemented different measures:
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