In October 2021, the Bank of England’s deputy governor for financial stability, Jon Cunliffe, warned that cryptocurrencies could spark a global financial crisis unless tough regulations were introduced.
At the time, Cunliffe’s concerns were about the rate of growth of the crypto asset market, which had moved from a $16 billion valuation five years earlier to $2.3 trillion in October 2021.
“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he said.
The reference to the USD$1.2 trillion subprime mortgage market in 2008 was deep. The crisis happened after years of high asset prices and “exuberance” in the bullish market sentiments. They all came down crashing in 2008, and the stark revelation that some of the “highly rated” asset classes were not even worth the paper that contracts were written on got many talking.
In the field of finance and economics, distinct periods of high and low economic activities are marked as boom-bust cycles. The finance and economics experts typically describe boom-bust cycle as a “series of events in which a rapid increase in business activity in the economy is followed by a rapid decrease in business activity, and this process is repeated again and again”.
In fact, with reference to the 2008 Global Financial Crisis (GFC), it is on record that at some point Queen Elizabeth II, Queen of the United Kingdom and 14 other Commonwealth realms, questioned why no one was able to spot the crisis early enough.
The truth, however, is that there were several calls by market analysts and leading economists about the high asset prices at the time, and even though the market was highly regulated, greed had morphed into selfishness, to the extent that many had turned a blind eye to the true picture, disrespecting the power of the market.
Okay. So with current developments, are we heading to another point in the history of the financial market where many would question why crypto assets were allowed to enjoy strong patronage despite the high market volatility? Well, the jury is still out on this- and may stay out for a while- but what is clear enough is that as a store of value, crypto assets seem to be short-changing many due to its high volatility.
Take the case of Terra (in fact it formed the basis of last week’s column), just about a month ago, its algorithmic stablecoin UST was de-pegged from the US dollar. And according to analysts, at the time, Terra’s native token LUNA and UST were the ninth and 10th largest cryptocurrencies by market capitalisation — together valued at $42 billion. But, today, both tokens have since evaporated- worthless. With it has come low market confidence in issuers of crypto assets.
With panic over rising inflation and higher interest rates globally, the appetite for higher-risk assets, such as cryptocurrencies seems to have waned.
“As inflation proves to be an even trickier opponent to beat than expected, bitcoin and ether are continuing to get a severe bruising in the ring,” said Susannah Streeter, a senior investment and markets analyst at the investment platform Hargreaves Lansdown in London.
“They are prime victims of the flight away from risky assets as investors fret about spiralling consumer prices around the world”.
What is also worrying, and causing market panic is the bad signal from some issuers of cryptocurrencies. In the early part of this week, while US investors were fretting about possible recession as S&P 500 plummeted into bear territory amid report that US Federal Reserve could raise interest rates by as much as 0.75 per cent- its biggest hike for nearly 30 years- bitcoin withdrawals were being temporarily suspended over “extreme” conditions.
A volatile day for the crypto market on June 13 saw a drop in bitcoin to a 17-month low, to US$23,629, after the announcement by the cryptocurrency lending platform, Celsius Network, that it had halted withdrawals because of “extreme market conditions”.
The Binance exchange temporarily suspended bitcoin withdrawals and the total value of the digital asset market dipped below $1tn (£820bn).
The decision by Celsius meant that all withdrawals and transfers between accounts for its 1.7 million customers were stopped! “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, swap, and transfers between accounts,” the platform said. “We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations”.
All said, let me just pose this question: “Is it the case that we should expect markets to remain at the same level over time? Of course not! In fact, there has to be change because if everything were to be static, monotonous and boring, it would breed boredom!
Can you imagine doing the same thing over and over again? I mean, won’t that drive you insane? Markets change, and should continue to change to reflect the changing dynamics of the larger society.
Since the creation of man, there is always a period where everything seems to be moving in the right direction, and also odd times when nothing seems to work, therefore, ups and downs, just like dry and rainy seasons, should be expected.
But what should also guide your thoughts is that the change dynamics of life also means that we should be measured in all we do, and bear in mind that so long as risk pervades finance much the same way that gravity pervades physics, we will all encounter risks- even if we decide to do nothing!
The good thing, though, is that all seasons present opportunities, it all depends on how you want to exploit them. Significantly, it can be damaging if you don’t plan well for all seasons and all situations.
And that also means that by taking on risks based on your risk appetite and your understanding of your exposure to risk. So, do you understand crypto assets well enough to dabble in it?