Evaluation of the Impact of Digital Assets on Financial Stability -Part 3

Aynsley Moore

Oct 11, 2021

Main risks of the cryptoasset market

Here is an assessment of the main risks of the cryptoasset market. When there is significant growth in the cryptoasset market, these major risks may have an impact on financial stability through the transmission channels that will be discussed later. The risks discussed include market liquidity risk, volatility risk, leverage risk, and technical and operational risk. Some are significant for cryptoassets such as volatility risks and technical and operational risks while others are common to many types of assets such as market liquidity risk and leverage risk.

1. Market liquidity risk

Many factors can lead to the vulnerability and lack of liquidity in the cryptoasset market and limit the ability of market participants to buy or sell cryptoassets. The ownership of cryptoassets is relatively concentrated in a small number of market participants, limiting the depth of the market and reduces the market’s ability to accommodate the huge volume of transactions. An illiquid market may also exacerbate risks from volatility. Operational problems of the trading platform may also lead to fragmentation of the market structure. A strong regulated trading platform, brokers and distributors can increase market liquidity by connecting buyers and sellers.

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