The European Central Bank (ECB) said on Wednesday the surge of Bitcoin has eclipsed previous financial bubbles like the “tulip mania” and the South Sea Bubble in the 1600s and 1700s and that its volatility makes Bitcoin “risky and speculative.”
“Signs of exuberance have also been observed in the renewed interest in crypto-assets, although financial stability risks appear limited,” said the ECB in the May 2021 Financial Stability Review (FSR).
“The surge in Bitcoin prices has eclipsed previous financial bubbles like the ‘tulip mania’ and the South Sea Bubble in the 1600s and 1700s
“While this has largely been driven by retail investors, some institutional investors and non-financial corporations are also demonstrating a growing interest.
“Its price volatility makes Bitcoin risky and speculative, while its exorbitant carbon footprint and potential use for illicit purposes are grounds for concern.
“Crypto-assets are still not used widely for payments, and euro area institutions have little exposure to crypto-linked financial instruments, so financial stability risks appear limited at present.”
The Review said the uneven economic impact of the pandemic means that financial stability risks are concentrated in specific sectors and countries, often with higher pre-existing vulnerabilities.
“As the euro area emerges from the third wave of the pandemic, risks to financial stability remain elevated and have become more unevenly distributed,” said Luis de Guindos, Vice-President of the ECB.
“A higher corporate debt burden in countries with larger services sectors could increase pressure on governments and banks in these countries …
“Extensive policy support, particularly for corporates, could gradually move from being broad-based to more targeted.”
The review said that policy measures helped corporate insolvencies to fall to historic lows during the pandemic.
However, it said that as this support is gradually removed, considerably higher insolvency rates than before the pandemic cannot be ruled out, especially in certain euro area countries.
“This in turn could weigh on sovereigns and banks which provided support to corporates during the pandemic,” said the ECB.