Stabilizing cryptocurrencies could cause new financial crisis: Dutch economic office

Bitcoin cryptocurrency and euros
Cryptocurrency bitcoin on a stack of euros. November 29, 2017.. (photo: Marco Verch / hedgecoin.de)

By now everyone is aware of the risks involved in investing in cryptocurrencies with their wildly fluctuating prices. But the real risks may only appear should cryptocurrencies' prices start stabilizing, according to the Netherlands office for economic policy analysis CPB. In the worst case scenario, this could lead to another global financial crisis, the CPB wrote in its annual report on the risks for the financial markets, RTL Z reports.

The financial crisis in 2008 was caused by American banks providing mortgages to customers who could not afford it, according to the broadcaster. These mortgages were then sold to other banks as new financial products, making it unclear what the underlying value and additional problems were. When mortgage holders could not repay their loans, banks lost massive amounts on these so-called subprime mortgages. This eventually led to the bankruptcy of Lehman Brothers and the financial crisis.

According to CPB, a similar scenario could happen if cryptocurrencies stabilize. If that happens, professional investors may be willing to lend money for investments in cryptos. If prices then suddenly fall, financial institutions could be "badly hit". Even if financial institutions themselves do not invest in cryptocurrencies because of the risk, their customers may do so. And not all private investors are equally well informed.

The CPB adds that there is as yet no reason to panic. Only 2 percent of Dutch investors have borrowed money to invest in cryptocurrency. The office estimates that around 150 million euros worth of bitcoins are traded in the Netherlands per month, a small amount compared to total investments. Therefore there are currently no major risks for Dutch financial institutions should cryptocurrencies crash.

Another risk CPB sees in the success of cryptocurrencies, is if one crypto coin becomes very successful and starts being used as a stable currency. That will have consequences for the policy of central banks, who will have less influence on the level of interest and the amount of money in circulation. But according to CPB, the chance of one crypto coin rising above all others is small.  

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