- Bitcoin failing would challenge the “liquidity paradigm,” Allianz’s chief economist said.
- Investors are using bitcoin instead of government bonds and gold to reduce risk, El-Erian said.
- They’re assuming that crypto will keep growing and governments won’t interfere, he added.
Bitcoin is not “too big to fail” – but could still disrupt the global monetary system if it collapses, Mohamed El-Erian told CNN this week.
The cryptocurrency’s failure would pose a threat to the “liquidity paradigm,” Allianz’s chief economic advisor said.
El-Erian explained that certain asset markets have been repressed, which is causing a “massive distortion.” As the Fed has kept interest rates low, the price of government bonds has become artificially high, making those bonds a less attractive option for investors looking to mitigate risk and diversify their portfolios, he said.
Just last week, US Treasury bond yields hit their highest level since January 2020 after trending upwards during the past twelve months.
The usual haven asset, gold, is also experiencing difficulties, which has driven investors to bitcoin. Despite the cryptocurrency’s volatility, some investors see it as “the least bad asset to use,” El-Erian said.
Investors are assuming that crypto assets will grow in popularity in the private sector and governments won’t interfere, the economist continued. However, he urged caution: “I tend to tell people: be really careful. This is an asset that wants to establish itself, but it can only establish itself if governments allow it to. And it takes away a lot from governments.”
Several central banks and governments remain wary of cryptocurrencies. Most recently, the chairman of the Monetary Authority of Singapore said this week that cryptocurrencies are “not suitable for retail investors” due to their high volatility.
Bitcoin failing could lead to another liquidity-related accident and cause disruption to the global monetary system, El-Erian said. He pointed out that there have already been three near-accidents this year, and it’s unclear which “little fender bender is going to cause a pile-up on the highway.”
While there’s plenty of liquidity “sloshing around the system,” “excessive and irresponsible risk-taking” is being encouraged in certain areas, El-Erian said.
Just last week, the implosion of Archegos Capital caused several stocks to tumble and led to billions of dollars in losses for investment banks. In January, retail traders fueled chaos in financial markets by snapping up GameStop and other heavily shorted meme stocks, driving up their prices and squeezing short-sellers.
However, El-Erian argued that the Fed has become reactive and might only change its policies if there’s an actual accident. “It’s pretty likely we’ll have some near accidents, if not an accident,” he said.