The Mirror's Health , Lifestyle and Fashion
Risk: No ifs no buts
The truth is, within the crypto ecosystem there is widespread collapse of crypto assets, some of which I have reported in previous editions of this column.
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Understandably, a number of high-profile firms have failed to live up to expectation in the crypto market- because of the market turbulence-, just as we have also experienced corporate failures of great magnitude in the “traditional” businesses that we are used to. So, what normally accounts for the collapse of businesses?
To deal with the broad nature of corporate failure, one may have to look at a number of factors. First, businesses, just like individuals, may run into liquidity challenges. In simple terms, if you are not able to cover key obligations when they fall due, it could be a sign of some cash problem, a recipe for failure too.
It means that you are not “liquid” enough to meet your obligations. For instance, if the school fees are due, and you are not liquid enough to cover the expense, it becomes a challenge, doesn’t it?
Well, economic agents act in similar ways, even though the magnitude of challenge differs. Or the weight of the problem is not the same.
So, using the example above as a peg, businesses may experience a liquidity crisis when they are not able to meet their obligations due to lack of cash and other liquid assets.
In fact, just like the case of the individual, you may be asset-rich but cash-poor! In other words, you may not be able to meet your obligations because you don’t have the cash immediately to pay, but you may have assets even far in excess of what you are struggling to pay.
The trouble here is that these assets are not cash or “near cash” and, therefore, you cannot easily convert them into cash to meet your obligations. That situation could be temporary, though, possibly triggered by some mismatches within your financial planning cycle, but it could also persist or become chronic when the decisive action is not taken to address the short-term liquidity risks. In effect, if you wallow in debt for too long, that is, persistently experience liquidity challenges, you are most likely going to be bankrupt because you will become insolvent. That is a certainty, and a major cause of corporate failure.
One other thing that you need to know is that it is not always that a company will collapse because it is not well managed. No. Liquidity crises can be triggered by large, negative economic shocks or by normal cyclical changes in the economy.
I am sure the “large, negative economic shocks” ring a bell in your ears! Perhaps it makes a loud sound because of our recent economic history.
Take the case of the COVID-19 pandemic for example. This was a health shock that hooked everything in society. Individuals, businesses and governments have suffered from the severe, and now the lingering effects of the pandemic.
These unexpected shocks caused some businesses to collapse, and of course, as some say, could have impacted on the strong winter of discontent, as far as the crypto market is concerned.
In fact, the pervasiveness of risk in the financial market cannot be discounted. And as l have repeatedly stated in this column, risk pervades finance much the same way that gravity pervades physics, so in all our dealings we must be mindful of the risk cover. Take a look, assess the risk, before you dive into the pool!
In actual fact, I set off this week’s column by considering the significant loss of value by Bitcoin, and other crypto assets, for good reasons. And one major reason that l would like to highlight is that the underlying risks in economics and finance do not change because of technology.
At best, the way these risks are managed and distributed can be changed by technology but it cannot eliminate them.
In fact, crypto assets enthusiasts have always argued that their technological design enables them to function as a hedge against economic volatility and inflation.
Some call it “digital gold”, in reference to the mining concept of these assets but as l have explained in this column time without number, these assets are highly risky and prone to speculation because they have no real economic assets backing them. Yes, forget about stablecoins too. The evidence is clear.
As l explained in the July 23 edition of this column, all signals point to an unstable crypto market. This is what l wrote in the referenced edition: “The collapse of Celsius, one of the world's largest cryptocurrency lenders, as reported on July 14 by the financial press is worrying indeed.
The high-profile nature of Celsius’ collapse, undoubtedly, caused a sharp fall in the price of other crypto assets. Bitcoin, for example, dropped below its benchmark level of US$20000. In fact, even though bitcoin recovered some of the lost ground, it was still a far cry from the trading price experienced just some few months back. But was the Celsius collapse a major surprise?
“To my mind, it shouldn’t be a big surprise to market watchers. In fact, in the June 18 edition of this column, l stressed on how a volatile day for crypto market on June 13 saw a drop in bitcoin to a 17-month low, to US$23,629, after the announcement by Celsius Network that it had halted withdrawals because of ‘extreme market conditions’.
At the time, 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!”
In sum, the point l want to make this week is that there are many examples of assets that give some assurance of “investment” but often lead to financial difficulties, mainly due to poor inherent risk assessment. In fact, if you want to stay liquid, speak to the right financial advisor/planner to ensure that you have the right investment mix. Avoid the investment pitfalls that can create challenges for you now, and in the future.
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