A new report warns that the widespread use of leveraged trading in the cryptocurrency market could lead to a financial crisis similar to the subprime mortgage crisis. The report highlights the risks associated with unregulated digital assets and the potential for large price swings to destabilize financial markets.
Cryptocurrencies have become the subject of serious debate over the last several years. But a new set of reports is warning they could bring down financial markets in the same way the subprime mortgage crisis caused the Great Recession more than fifteen years ago. Entwining larger digital assets like Bitcoin in with traditional markets could set off a ripple effect where consumers begin taking out loans in larger amounts to finance risky cryptocurrency bets, a report from New York suggests.
The process is called 'leveraged trading,' which consists of a crypto owner trading with borrowed capital from a broker to enhance buying power. Such digital assets are not associated with any government controls or regulations, potentially leading to huge price swings and volatility. Many Americans lost their life savings dabbling in these markets in recent years, but most of those losses were contained to niche areas of a largely unregulated sector of the economy. “The use of leverage by crypto investors appears widespread, amplifying investors’ exposure to shocks to crypto-asset prices and the feedback loop between leverage and crypto-asset prices,” the economists wrote in the report. If enough people begin investing in those firms, it could put substantial strain on household budgets, leading to higher delinquency rates, they argue. New accounts for trading Bitcoin rose 26% in the ten days after President-elect Donald Trump won the election last month, The Washington Post reported in November. During his presidential campaign, Trump promised to become a major supporter of cryptocurrencies.He recently announced plans to create a U.S. bitcoin strategic reserve as the valuation of the gold standard digital coin breezed past $100,000. Analysts worry going that route would effectively tether crypto into the wider U.S. economy at the expense of smaller crypto owner
Cryptocurrency Leveraged Trading Financial Crisis Risk Regulation
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