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Crypto’s turbulence teaches hard, but not new, lessons

Fortune favours the brave, so one crypto exchange, crypto.com, exhorted in a commercial fronted by basketball’s LeBron James. It was part of a crypto advertising blitz during February’s Super Bowl, when the industry splashed out on celebrity-endorsed segments that would reach more than 200mn viewers. Crypto truly arrived in the mainstream. Four months later, so too have heavy losses, as the war in Ukraine, creeping inflation and general market jitters have tamed animal spirits.

This week alone, a big crypto exchange, Binance, briefly halted bitcoin withdrawals, and Celsius, a lending platform, blocked redemptions. Meanwhile crypto.com, perhaps not feeling as brave as it did, announced job cuts, as did a listed rival, Coinbase. The value of bitcoin temporarily dipped below its “realised price” of $20,000 from its November high of $68,000 — meaning the average buyer has lost money.

It has been a hard lesson to learn for many. For some, the lesson has been life-changing. In South Korea, additional police have been dispatched to patrol Seoul’s Mapo Bridge, a known suicide spot, since last month’s collapse of a so-called algorithmic stablecoin, terraUSD. But it’s not a new lesson: fear and greed are powerful motivators, and even assets with little inherent value will rise in price if there is enough demand, be they tulip bulbs or cryptocurrencies. Or, as Bill Gates put it this week: cryptocurrencies are “100 per cent based on greater fool theory”. 

For others, including large macro investors that have bought into crypto, the fact that it is a speculative, highly volatile bet is the point. But as appetite for risk has diminished this year, shedding crypto is an easy move. This has naturally exacerbated crypto’s decline, and is most keenly felt by unsophisticated investors.

Recent turbulence has heightened calls for those armchair investors to be protected. Certainly, those who sell them false promises should be outlawed, as they would be in any industry. Tokens that are arguably securities yet do not comply with existing laws are rightly beginning to face the wrath of markets watchdogs. But many taxpayers would balk at the idea that they should bail out others who have taken a punt on risky assets that have come with consistent warnings. Unfortunately, a lesson for regulators is that their health warnings around crypto are no match for endorsements by Hollywood actors or Premier League football clubs.

The risk of widespread losses — and of crypto’s turmoil spilling over into the real world — is sufficient that some guardrails are needed. There has been some progress in the US, UK and EU to begin designing frameworks, despite internal turf wars and concerns that complicating the current simplicity of a mostly unregulated, unprotected product may bring its own unintended consequences. But how can a phenomenon that is everywhere yet nowhere be properly regulated? Crypto’s decentralised structure is designed to be out of the reach of national governments — a red flag or a libertarian goal, depending on viewpoint.

A start would be to focus on where crypto and fiat currencies meet, namely stablecoins, which claim to be underpinned by real-world assets as a way for traders to park their cash safely between bets on more volatile coins. That promise needs to be audited, and stablecoins should be subject to capital and liquidity requirements. But unless there is lockstep action taken around the world, little will be accomplished to control an online industry that operates beyond borders. Until then, investors ought to remember another adage that the crypto industry has not pushed: if it looks too good to be true, it probably is.


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