As the price of bitcoin continues to hit new highs, reaching as far as $17,500 at the time of writing, mainstream market forecasters are taking a serious look at the possible risks it poses to the stock market.
Bitcoin Crash Fallout
Their primary worry is that the impact of a crash in the digital currency’s price could spill over to the broader market as well.
Bitcoin is the most popular and widely circulated cryptocurrency in the world today. It started the year with a bang by surpassing $1,000 for the first time since late 2013. But even then most investors would probably find it hard to believe if someone told them that bitcoin’s dollar valuation would increase by a whopping 1,653 percent in less than 12 months.
While many early investors are rejoicing bitcoin’s unprecedented rise, skeptics are worried that it is only going through what they call a “bubble” that will inevitably burst sooner or later. A bitcoin bubble is one reason why many major financial institutions across the globe are reluctant to invest in virtual currencies.
And now adding more to those worries, some forecasters are predicting that a burst in value will cause collateral damage in the stock market. Among these forecasters is Nuveen Asset Management’s Bob Doll.
According to Doll, the spillover effect is unavoidable even though bitcoin is not accounted for in his official 2018 stock market predictions.
“It’s sort of been until recently pretty isolated. We can’t have a conversation without bitcoin showing up,” he said in a conversation with CNBC‘s “Trading Nation.”
“Somebody will get scared if bitcoin drops by 30 percent in a short period of time.”
He further stated that the longer bitcoin’s wild run continues, the worse the impact of its fall will be for the stock market. Doll said “jitters” will be created “even though the fundamental overflow is pretty nonexistent.”
Note that Doll is not the only analyst to have predicted this so-called spillover effect. Torsten Slok, Deutsche Bank’s Chief International Economist, made a similar remark last week when he prophesized that a crash in bitcoin’s price could severely affect the broader market in 2018.
Slok included the possible threat from bitcoin in a list of 30 market risks that could adversely affect growth in 2018. The list, which he has shared with many global publications, ranks the widely-speculated impending bitcoin crash as the thirteenth highest risk.
However, not everyone seems to agree with these worrying forecasts. According to Capital Economics, a bitcoin collapse is unlikely to have much impact on other segments of the capital market or the economy. It argues that despite the mind-boggling numbers of its bull run, bitcoin’s strategic reach, for now, is meager.
It further states that even if bitcoin prices dropped to zero in the near future, the loss would be equivalent to a fall of only 0.6 percent in US equity prices.