What is Currency Crisis?

A currency crisis is an event caused by concerns over a country’s central bank’s ability to keep the currency stable with sufficient foreign exchange reserves. In some instances, the term ‘currency crisis’ may be used interchangeably with ‘financial crisis’.

A speculative attack occurs in foreign exchange markets when a currency that is trying to maintain a pegged exchange rate is suddenly attacked by speculators. A shortage of foreign currency reserves to purchase enough domestic currency can lead to the pegged value dropping significantly.

If a currency is devalued, people influenced by the situation may panic-sell it at rates that are far lower than acceptable. This leads to further depreciation of the currency.

Currency crises cause significant damage to small-scale open economies or less stable countries. Governments have to take the responsibility for fending off speculative attacks. In this case, the currency reserves or foreign reserves must meet the excess demand for the currency experiencing the crisis.

There are numerous causes for currency crises. Some of the most prominent are inflation, credit unbalancing, debt rise, and political troubles. The high volatility of currency exchange rates in the national economy can also influence a currency crisis.

There have been several instances of financial crises throughout history, including:

• The Great Depression (1929-1939) – following the Wall Street crash in 1929, a financial crisis started, leading to unemployment levels of 25%;
• The 1997 Asian Crisis – caused by speculative capital flows, it led to massive credit and debt accumulation in Thailand, later affecting all of East Asia;
• The 2007-08 Global Financial Crisis – the first global-scale financial crisis of the 21st century that is considered to be one of the worst economic crashes in history. It started in the US after the investment bank Lehman Brothers declared bankruptcy.

Bitcoin (BTC), the world’s first cryptocurrency, was founded in November 2008 and officially launched in January 2009. It was created by an unknown entity going by the pseudonym Satoshi Nakamoto. The goal was to create a fully decentralized digital currency that would not be controlled by central banks.

In 2010, the value of one BTC was below a dollar. In November 2021, over a decade since its inception, Bitcoin reached its peak at around $69,000 per coin. It is considered to be the biggest cryptocurrency in the world by market capitalization.

Although, unlike fiat money which is more prone to currency crises, cryptocurrencies are decentralized and highly volatile. However, the volatility of crypto makes some investors feel wary.