Bitcoin isn't 'too big to fail' but could still disrupt the global monetary system, veteran economist Mohamed El-Erian says
Bitcoinfailing would challenge the " liquidityparadigm," Allianz's chief economist said.
- Investors are using bitcoin instead of government bonds and gold to reduce risk, El-Erian said.
- They're assuming that
cryptowill keep growing and governments won't interfere, he added.
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Bitcoin is not "too big to fail" - but could still disrupt the global monetary system if it collapses,
The cryptocurrency's failure would pose a threat to the "liquidity paradigm," Allianz's chief economic advisor said.El-Erian explained that certain asset
The usual haven asset, gold, is also experiencing difficulties, which has driven investors to bitcoin. Despite the cryptocurrency's volatility, some investors see it as "the least bad asset to use," El-Erian said.Investors are assuming that crypto assets will grow in popularity in the private sector and governments won't interfere, the economist continued. However, he urged caution: "I tend to tell people: be really careful. This is an asset that wants to establish itself, but it can only establish itself if governments allow it to. And it takes away a lot from governments."
Several central banks and governments remain wary of cryptocurrencies. Most recently, the chairman of the Monetary Authority of Singapore said this week that cryptocurrencies are "not suitable for retail investors" due to their high volatility.Bitcoin failing could lead to another liquidity-related accident and cause disruption to the global monetary system, El-Erian said. He pointed out that there have already been three near-accidents this year, and it's unclear which "little fender bender is going to cause a pile-up on the highway." While there's plenty of liquidity "sloshing around the system," "excessive and irresponsible risk-taking" is being encouraged in certain areas, El-Erian said.
Just last week, the implosion of Archegos Capital caused several stocks to tumble and led to billions of dollars in losses for investment banks. In January, retail traders fueled chaos in financial markets by snapping up GameStop and other heavily shorted meme stocks, driving up their prices and squeezing short-sellers.
However, El-Erian argued that the Fed has become reactive and might only change its policies if there's an actual accident. "It's pretty likely we'll have some near accidents, if not an accident," he said.
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