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Is the Bitcoin Market a Threat to Financial Stability?

Bitcoin is growing in popularity at a very high rate. Within just 13 years, Bitcoin users have grown to over 190 million. This drastic growth has not gone unnoticed. Many governments have raised concerns about the lack of regulation for Bitcoin and how this could cause problems to the financial system.

China went even further to ban Bitcoin and other cryptocurrencies in 2021. Among the reasons for the ban was to prevent the financial instability that the highly speculative nature of cryptocurrencies could occasion. Another reason was to prevent financial crime through cryptocurrencies. However, some believe the government feared the massive capital flight from the Chinese market. So, does Bitcoin threaten financial stability? To answer this, it’s crucial to first look at some facts.

Bitcoin Market is Small

One factor that makes governments and other entities consider the Bitcoin market a threat to financial stability is the size of the market. Currently, the Bitcoin market capitalization is just above $400 billion. This figure exceeded $1 billion in March and November 2021.

While it’s true that Bitcoin’s market capitalization has grown dramatically over the years, it remains a tiny portion of the larger financial market. The value is lower than traditional assets like gold, whose market capitalization exceeds $11 trillion. It is even much smaller than the size of the global real estate market.

The reality is that Bitcoin’s market size is not as large as most critics may want you to believe. The smaller size compared to other asset categories and the larger global financial market means that Bitcoin does not have the power to have such a significant negative impact on the financial system.

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Bitcoin Market Regulation

One of the issues that many governments have raised regarding Bitcoin is its deregulation. Bitcoin relies on a decentralized network, meaning governments or financial institutions cannot control it. Governments, through Central Bank and other entities, have this control over the centralized financial system.

Bitcoin’s blockchain technology ensures that no single entity controls Bitcoin. For example, no government can influence the amount of Bitcoin in circulation or the price. And this makes governments worry that Bitcoin could threaten the financial system without such control. For example, some critics argue that the Bitcoin market could attract criminals who don’t want their criminal activities tracked.

But even this argument does not hold any water. Today, many governments are adopting new regulations for the Bitcoin market. For instance, the government now requires crypto exchanges to register and provide Bitcoin use details for taxation. With growing calls for more regulations for the Bitcoin market, governments will most likely introduce more crypto laws.

With more regulations for the Bitcoin market, concerns about the risk of lack of law should become baseless. The crypto industry is unlike a black market, where things will continue in darkness. Moreover, the majority of Bitcoin users are honest. So why worry about the risk of deregulation?

Parting Shot

The Bitcoin market does not threaten the financial system per se. While governments can do more to ensure that this critical market remains a valuable part of the more extensive financial system, like introducing more regulations, the threat that the market poses is relatively insignificant. If we were talking about the larger cryptocurrency market, we could appreciate its threat to the financial system.