Many seem to forget that cryptocurrencies have only been around for a decade or so. Since then, the trajectory has been largely one of influence. For instance, Bitcoin, one of the earliest digital currencies in the world, has almost tripled in value over the course of the past seven months. As a result of Bitcoin’s success, there have been a number of other currencies spawned, some of which, like Ripple and Ethereum, have also enjoyed gains in recent months. However, other new currencies have continued to remain motionless in terms of price, as they have not been picked up by a broad audience as of yet. That said, none of the currencies have gone through a major crash – and even if they do, it might not be a bad thing. In fact, Robert C. Wolcott, co-founder of the Kellogg Innovation Network, recently said that not only are market crashes inevitable, but they may, in fact, help the cryptocurrency sector as a whole.
Crashes Can Create Investment Innovation
In a recent piece for Forbes Magazine, Wolcott indicates that we can “confidently predict there will be casualties” in the cryptocurrency sector. Though he does not pinpoint when that will occur, Wolcott points out that investment innovations tend to play defining roles in financial crises. To further his point, Wolcott cites the importance of increased leverage for retail investors in bringing about the 1929 stock market crash as well as structured instruments that contributed to the financial crisis in 2008. Even though these innovations have become infamous for their roles in financial hysterias which led to crashes, they still “end up becoming functional parts of our financial system.” Wolcott singles out junk bonds and collateralized debt obligations as examples of recent innovations which have become widespread.
A Large Scale Industry Means More Risk
Wolcott also suggests that the scale of industry innovations means that they lead to greater risk levels for a larger group of investors. “When a new financial instrument starts making someone money, others pile in. A few early entrants do remarkably well. Later entrants, providers or investors, have to pay a higher price and assume more risk.”
To simplify, Wolcott believes that it may actually be better to have one or more cryptocurrencies fail early on, so that the sector as a whole may learn from its mistakes.
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