A currency crisis is termed as a financial emergency in which a country's fiat currency loses value, and investors become cautious of retaining/investing in that country's assets.
A currency crisis occurs when there is considerable concern over whether a country's central bank has adequate foreign exchange reserves to keep the country's currency stable.
A speculative attack on the foreign currency market frequently occurs in conjunction with a crisis. These are marketplaces where individuals can buy and sell currencies in the same way that they can buy and sell equities on the stock exchanges which might further depreciate the currency - also called the currency depreciation bubble.
In an event of devaluation, many people panic-sell the currency at rates way below what is acceptable, given the current situation, and the currency depreciates even more than it should.
Currency crises can be particularly damaging to small open economies or larger, but less stable countries. Governments frequently take up the responsibility of fighting off such attacks by utilizing their currency reserves or foreign reserves to meet the excess demand for a specific currency.
The reasons behind the cause of the currency crisis include inflation, political instability, the rise of debts, credit unbalancing, and other economic factors, such as the high volatility of currency exchange rates in a country's economy.
In some scenarios, ‘financial crisis’ is another term used for a currency crisis. Some popular examples of such a crisis include:
Interestingly, Bitcoin (BTC) was founded in November 2008 by Satoshi Nakamoto, 2 months after the Lehmann crisis. Satoshi believed Bitcoin to be a revolutionary currency that is completely decentralized. Therefore, it cannot be controlled by central banks, who can manipulate the price and break the trust of ordinary people.
Bitcoin was valued under $1 in 2010, however, a decade later in 2021, it hit an all-time high of $64,888.99. Since then, it has maintained its position as the biggest cryptocurrency in the world.
Although most cryptocurrencies are not part of any central or regulated system. like fiat currencies (prone to currency crisis), the high volatility surrounding them remains a major concern for investors.
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