Understanding Currency Crisis
A currency crisis occurs when there are doubts about a country’s central bank’s ability to maintain the stability of its currency due to insufficient foreign exchange reserves.
Typically, a currency crisis is accompanied by a speculative attack on the foreign currency market. These markets allow individuals to buy and sell currencies similar to equities on stock exchanges, which can lead to further depreciation of the currency, also known as the currency depreciation bubble.
During a devaluation, many people panic-sell the currency at rates well below acceptable levels, causing the currency to depreciate even more than it should.
Currency crises can be particularly damaging to small open economies or larger, less stable countries. Governments often intervene to counter such attacks by using their currency reserves or foreign reserves to meet the excess demand for a specific currency.
The causes of currency crises include inflation, political instability, increasing debts, credit imbalances, and economic factors such as high volatility in currency exchange rates.
Sometimes, a currency crisis is also known as a “financial crisis.” Historical examples of currency crises include:
- The Credit Crisis of 1772: This crisis originated in London and spread across Europe due to excessive credit expansion by the British empire.
- The Great Depression of 1929–39: Triggered by the Wall Street crash in the USA in 1929, this crisis resulted in record-high unemployment rates of 25%.
- The OPEC Oil Price Shock of 1973: Arab nations cutting off oil supplies to the U.S. and other countries initiated this crisis.
- The Asian Crisis of 1997: Starting in Thailand and spreading to East Asia, this crisis was caused by speculative capital flows leading to excessive credit and debt accumulation.
- The Financial Crisis of 2007–08: Considered one of the most significant crises of the 21st century, this crisis is often compared to the Great Depression. It was triggered by the bankruptcy of Lehman Brothers, one of the largest investment banks. The recovery from this crash was time-consuming and costly, resulting in the loss of millions of jobs.
Interestingly, Bitcoin (BTC) was established in November 2008 by Satoshi Nakamoto, just two months after the Lehman crisis. Satoshi envisioned Bitcoin as a revolutionary decentralized currency that cannot be controlled by central banks, thereby preserving the trust of ordinary people.
In 2010, Bitcoin was valued at less than $1. However, a decade later in 2021, it reached an all-time high of $64,888.99, solidifying its position as the largest cryptocurrency globally.
While most cryptocurrencies are not part of any central or regulated system like fiat currencies, which are susceptible to currency crises, the high volatility surrounding cryptocurrencies remains a significant concern for investors.