Why You Don’t Need To Worry About Bitcoin’s Latest Plunge

If you’re concerned that a collapse in the bitcoin price could lead to turmoil in other financial markets, this chart should put your mind at ease. From Capital Economics, it shows the percentage change in various asset classes — including bitcoin — from December 18 until January 3 this year.

While bitcoin’s price plummeted by 40% before bouncing in late December, other riskier assets such as stocks barely raised an eyebrow.

For all the chatter about the potential for movements in bitcoin to spill over into other asset classes, the reality was there was no real reaction to the sharp and sudden plunge.

To Kerrie Walsh, assistant economist at Capital Economics, there are two simple reasons to explain why other markets didn’t move: Bitcoin’s market capitalisation is still far too small and its movements are often triggered by specific factors that aren’t relevant to other asset classes.

“First, the market capitalisation of bitcoin is still too small for it to have any serious consequences for wider financial markets,” she says.

“At around $250 billion, the total value of all Bitcoins in circulation is dwarfed by the size of the US stock market at $27 trillion and the value of the world’s gold at $8 trillion.

“What’s more, although the launch of bitcoin futures in December raised concerns that the cryptocurrency could eventually become more deeply integrated in the financial system, this has not been the case so far. Trading volumes for these futures remain minuscule compared to those of futures for more conventional assets.”

Along with a small comparative size compared to other asset classes, Walsh says movements in bitcoin are also dictated by specific factors that are irrelevant to other markets.

“[The] movements in the price of Bitcoin do not seem to be triggered by economic factors. Instead, they have more to do with events in the cryptocurrency community.” she says.

“Indeed, the latest drop in the price of Bitcoin seems to have been prompted by attempts to hack cryptocurrency exchanges and the threat of increased regulation.”

Given the lack of reaction to the either the plunge or bounce in bitcoin in late December, Walsh says this gives her more confidence that even if the price of bitcoin were to plummet further, other financial markets would not suffer.