According to a major Wall Street firm, the crash in cryptocurrencies can spill over to the equity markets. According to Christopher Harvey of Wells Fargo Securities, the cryptocurrency markets have a lot of froth. This froth can easily spill over to the equity markets.
His comments come after a steep fall in the prices of Bitcoins as well as other cryptocurrencies. According to him, the crash is not a one-day event but rather it would be extended over months. If indeed, that happens it can result in a crash in equity markets as well.
He also states that the high level of speculation and the froth which is present in the cryptocurrency market would result in a crash in the equity markets as well. Moreover, this fear has been heightened after the initiation of futures trading as well. It is common for brokers to sell the stocks in order to make up for the shortcomings in the margin in futures trading. Therefore, when the cryptocurrency market actually crashes, it would trigger a selling panic in the equity markets as well in order to make up for the margin shortcoming.
Moreover, since cryptocurrency is a global phenomenon, it can result in market reactions all across the world. This is one of the main reasons why many traders are warning against a crash in the cryptocurrency market.
The cryptocurrency market runs primarily on sentiment. Once big enough crash be initiated, the sentiment can turn negative quite easily. Owing to this very reason, the investors in cryptocurrencies would actually start selling quite quickly. This is one of the main reasons why many people fear a crash in the cryptocurrency prices.
It remains to be seen whether the current crash is longer enough in order to generate any ripples in the equity markets. One thing however which is quite sure is that if the sentiment worsens, it would definitely have an impact on the equity markets over a longer period of time. This however also depends on the level of trading which is done in Bitcoin futures as well as in the cryptocurrency market as a whole. Up until now, only a small portion of the investors have actually switched over to the cryptocurrency market in order to earn profits. Is this percentage increases, any downturn in the cryptocurrency market would actually add to the volatility in the equity markets as well which can result in panic selling.