Yesterday markets went into panic, as stocks plummeted in American, European and then Asian markets. Since the election of Donald Trump in late 2016, the Dow Jones industrial average has risen by more than 40%. Although not nearly to the same degree as Bitcoin, there has been much talk lately of bubbles in financial markets with some concerned we are on the brink of a major crash. Economics editor at The Guardian Larry Elliot, like other commentators, believes this was merely a correction, due in part to “the willingness of central banks to supply copious amounts of money to the markets at ultra-low interest rates”. So far it appears that this may indeed have been a correction and not a crash. Although the Dow Jones saw a decline of around 5% in one day, dropping by 1,100 points, markets bounced back a bit today as confidence returned and fear of a major crash lifted.
Some see the Bitcoin frenzy over the past year as an expression of reckless risk-taking and overconfidence that is often witnessed prior to a major correction. The global financial crisis in 2008 seems like a distant memory, and people have been taking on greater risk with borrowed money in various markets. This has been very common in the crypto space, where buyers often use credit cards to purchase tokens or trade with a margin account. Many who bought crypto with credit at the market’s peak in late December will likely still be hurting.
As stock markets fell yesterday, it was clear that money wasn’t moving into Bitcoin, which continued to drop. Nor was capital moving into gold, which was one of the reasons that many argued the event was a correction and not a market crash. The cryptocurrency market has also experienced a major correction recently, which many have argued is the bubble finally bursting. Over the past month, more than $550 billion has been wiped from the cryptocurrency market, in part due to an increasing number of crackdowns from governments and banks. Today was the first ray of sunshine in a while for crypto enthusiasts as the crypto market bounced back, along with the financial markets in the US (European markets have not experienced the same speedy recovery).
The crypto market is somewhat unique in that it is still largely comprised of retail or individual investors. Growth, however, has still been fuelled by borrowed money, especially credit card purchases. Banks, such as Lloyds, have started to ban credit card purchases of cryptocurrency, likely wishing to avoid associated risk. Banks, however, are not making this move across the board. The major Australian banks, for example, stated recently that they would not stop their customers from purchasing cryptocurrency with their credit cards.