Retail Investors Would Be Most Hit By a Market Collapse, Study Says

Retail investors would be the first to bear the brunt in the event of a collapse in cryptocurrencies’ market value, CNBC reported, citing a report by an investment research company S&P Global Ratings.

The company expects that “rated banks to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited”.

Retail investors are individual investors who buy and sell securities for their personal account, and not for another company or organization, as opposed to institutional investors.

S&P suggested that a price crash could be likely as the market has “many characteristics of a traditional bubble.”

Cryptocurrencies experienced a significant drop in price this month, when Bitcoin dipped below USD 6,000 for the first time in weeks. While it is still recovering, it remains under the record high market cap by some USD 330 billion. The Bitcoin price fall happened concurrently with a global stock market sell-off in early February, implying that there is a correlation between crypto and established financial assets.

According to S&P Global Ratings, the correlation is not so established and a huge drop in crypto value would not be enough to bring down financial markets with them.

Dr Mohamed Damak, S&P Global Ratings financial institutions sector lead, said in a statement, “In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.”

But on the topic of the future of cryptocurrency, Damak says there is still a long way to go: “We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants’ confidence in these instruments.”

S&P’s report also warns of price manipulation with just 1,650 users (addresses) owning more than 1,000 Bitcoins in their portfolio, controlling as many Bitcoins as the 26.3 million users with less than 100 Bitcoins in their portfolio. The report said: “We believe that this concentration, along with the unregulated nature of this instrument makes it prone to market manipulation.”

Blockchain as a technology, however, is once again praised for its versatility and myriad of uses. Damak and his team wrote: “Blockchain technology… could be a positive disrupter for various financial value-chains. If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability, and cost of financial transactions.”