Understanding System Risk in Financial Markets: Risks of Crypto Currency
The growth of the CRIPTO currency has brought significant changes in financial markets, and its decentralized and peer nature attracts many investors. However, despite growing popularity, the Crypto currency also caused concern about systemic risk. In this article we will be implemented at the concept of systemic risk in financial markets, including risks associated with cryptocurrency currency.
What is the systemic risk?
Systemic risk refers to the potential for a wide and interconnected crisis that could have catastrophic consequences for the entire financial system. These include multiple factors that gather to create collapse on the entire system, which is often triggered by an event or a combination of events. In financial markets, system risk can occur from different sources, including the market volatility, credit risk, liquidity risk and the risk of another contracting party.
System Risk types
There are several types of system risk that may affect financial markets, including:
- Market risk
: This type of risk occurs when a particular investment or industry experiences a decrease in values due to external factors such as economic decline, market fluctuations or regulatory changes.
- Credit Risk : This type of risk involves a potential loss of capital due to the default or non -solventh of the borrower or publisher, often launched by changes in credit conditions.
- Liquinity risk : This type of risk occurs when there is not enough liquidity in the financial markets, which makes it difficult or expensive to buy or sell assets quickly enough.
- The other side risk : This type of risk involves the potential loss of value due to the failure of the other side to fulfill its obligations.
CRIPTO currency and systemic risk
The growth of the Crypto currency emphasized concern about systemic risk in financial markets. Here are some reasons why:
- Volatility : Cryptative prices can vary quickly, leading to significant prices changes that can affect the market participants.
- Liquidity risks : Lack of regulation and supervision in the cryptocurrency space may make it difficult for investors to access or sell their property quickly enough, increasing the risk of liquidity.
- The risk of the second contracting side : the decentralized nature of the crypto -valjutic transactions means that there is no central other side (CCP) that would act as a reliable intermediary between the customers and the seller.
- Market concentration : Global cryptocurrency market is becoming more concentrated, and larger players dominate the space. This concentration can create systemic risks if one or more of these players experience a crisis.
Examples in the real world
Several high examples have highlighted the risks associated with the CRIPTO currency:
- 2017 CRYPTO MARKET CLAPS : A significant drop in Bitcoin’s price has led to a huge sale, which caused losses for investors and market disturbance around the world.
- 2018. Crypto Crash Venezuela : Attempted by the Venezuelan Government to ban the cryptocurrent currency has encountered a wide criticism, leading to a rapid decline in property of property such as bitcoinuadories.
- 2020 Bitcoin Flash Crash : A sudden increase in Bitcoin prices has led to a fast market correction, causing significant losses for investors.
System Risk Mitigation
To alleviate system risk associated with cryptocurrencies and other financial instruments, regulators have implemented different measures:
- Regulatory frames : Governments and regulatory bodies have established guidelines and regulations for monitoring the development of the CRIPTO currency.
- Liquidity securing : It encourages financial institutions to support liquidity for cryptocurrency markets.
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