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:
- The Credit Crisis of 1772 - Started in London and spread across Europe. It was caused by the British empire which stored a lot of wealth, creating an overflow of credit expansion.
- The Great Depression of 1929–39 - Triggered by the USA Wall Street crash in 1929, causing unemployment to hit an all-time high of 25%.
- The OPEC Oil Price Shock of 1973 - Started by Arab nations where they cut-off oil supplies to the U.S. and other world nations.
- The Asian Crisis of 1997 - Started in Thailand and spread to East Asia. It was caused by speculative capital flows which caused an overflow of credit and debt accumulation.
- The Financial Crisis of 2007–08 - The most popular example of the 21st century which is often linked to being worse than the Great Depression crisis. It happened because one of the biggest investment banks, Lehman Brothers, declared bankruptcy. The effects of this crash took a lot of time and finance to recover as millions of jobs were wiped away in a short period.
- 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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