The short answer to whether or not the forex market will crash or not is yes and no. considering that the forex market is the largest financial market in the world, the market as such will most likely not crash but specific currencies might crash at any time without warning. Such a crash is called a flash crash and the crash of one currency can cause the crash of several other currencies along with it.
Difference Between Forex and Stock crashes
Stock market crashes are very different from forex market crashes. When there is a stock market crash, in one particular blue chip stock, it can affect the majority of the stocks that make up the index in a negative way, and this holds true for all stock markets and indices.
Forex market crashes, on the other hand, affect a single currency such as the British pound, US dollar etc. This can force the investors to sell off the currency in a hurry, hence decreasing the value of the currency. However there is an upside to this. For example, if the British pound crashes all of a sudden, the investors will try to sell it to people holding another valued currency, say the US dollar. So when this happens, the British pound might get depreciated extremely, but this also appreciates the value of the US dollar as much as well. The fact that the forex market is made of several currency pairs ensures that the forex market on the whole never crashes.
The Causes Of Currency Crashes
There are two main types of crashes that can happen in the forex market: flash crashes and long term crashes. Flash crashes take place in seconds, but the good news is that they last only for an hour or so. Long term crashes on the other hand can last for months, or probably even years. Whichever crash it may be, the investors holding the crash can incur major losses, sometimes even getting their entire account wiped out.
Long Term Currency Crashes
These types of crashes are usually related to the socioeconomic environment of the country and they usually last for a very long time. Some of the causes of such a crash include government coup, massive economic challenges in a country and hyperinflation. They usually occur when an autocratic government refuses to accept investors into the country, and because of the lack of strong institutions and the autocratic government making unpopular policies, leading to a slow but inevitable currency crash in the forex market.
The flash crash is the most dangerous of the two, because the effects of a flash crash can be completely unexpected and therefore a large amount of money might be wiped out of the people’s accounts who have that currency pair. There may be no underlying cause for this either, and this makes flash crashes all the more dangerous.