The Bank of England says the downturn seen across the risky asset markets, including crypto, might not be over just yet.
The UK central bank, in a report published on Tuesday, notes that the global financial markets have been extremely volatile these past few months.
Crypto and risk assets vulnerable
According to the bank, the markets have been hit even harder amid global economic decline. But investors should be weary of even more pain. The BoE’s Financial Policy Committee report highlights what might help the bearish outlook thus:
Given downside risks from additional supply shocks, faster-than-expected monetary policy tightening and slower-than-expected economic growth, risky asset prices remain vulnerable to further sharp adjustments.”
The crypto market valuation has fallen below $1 trillion after major losses, with Bitcoin and other top cryptocurrencies shedding over half of their value since hitting all-time highs in 2021. It’s an outlook the FPC points to as what has exposed “a number of vulnerabilities” that could continue to impact the market.
According to the central bank report, these vulnerabilities are similar to “past episodes of instability in more traditional parts of the financial system.” In short, the wipeout is not at levels seen across other major market developments – what happened during the dotcom era could be a good example.
Currently, crypto is facing wider contagion amid liquidity turmoil and massive unwinding of leveraged positions, catalyzing further price falls.
Notably, though, the FPC does not think the contagion within the crypto market currently poses risks to overall financial stability. However, systemic risks are likely given cryptocurrency’s continued growth and interconnectedness with the broader financial system.
This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities.”
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