The surge of bitcoin has been raising fears that it could be approaching bubble territory. Analysis from Capital Economics, however, says its crash wouldn’t be that big of a deal for the broader financial markets.
“Unlike the bubbles in the tech sector in the late 1990s and in US residential property a few years later, a bursting of the bitcoin bubble should not have systemic, macroeconomic implications,” analyst Andrew Kenningham said. “The total value of bitcoin is (still) too small, and it has few links with the wider economy.”
According to the report, “There are several channels through which a bursting of an asset-price bubble can have macroeconomic consequences, but none is a major risk in the case of bitcoin.”
It explained that, at first, there may be “a hit to household spending as people who have invested suffer losses. But bitcoin’s market [capitalization] is too small for this to be a worry.”
The price of the world’s most popular cryptocurrency bitcoin has soared by almost 2,000 percent year-to-date. On Friday, it was up by almost 5 percent, trading at $14,375. The cryptocurrency’s market cap is currently around $252.6 billion.
A complete bitcoin crash would be the equivalent of just a 0.6 percent fall in US stocks, the report states. “While a bursting bubble can affect the economy via the banking sector, this is not much of a risk either, precisely because bitcoin is held and traded outside the banking sector. Also, there is no evidence that investment in bitcoin is being financed by the equivalent of sub-prime mortgages.”
The report also said there’s almost no correlation between bitcoin and risk assets like stock prices.
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