The fact that cryptocurrencies are new is not the reason FTX is declaring bankruptcy today.
Cryptocurrency has been heralded as the most significant breakthrough to occur in financial markets in decades due to its potential to revolutionize the established financial system. Many investors wished to profit from its rapid expansion. Additionally, in the assumption that they would act as a hedge against increasing inflation, investors flocked to cryptocurrencies. That strategy, however, has been derailed by the reality of continuous inflation and the “Crypto Winter,” which is currently dragging down industry leader FTX. Let’s examine the reasons the hypothesis is invalid.
The coincidence between cryptocurrencies and inflation In 2017, cryptocurrency gained popularity. It is viewed as money by some and a commodity by others. Due to the way that currencies respond to inflation, I think it isn’t yet a currency. Cryptocurrency is neither inflationary nor anti-inflationary; its acceptance is still in its infancy, and it hasn’t had enough time to establish itself in the system.
The growth of cryptocurrency can be linked to the fact that it occurred during a period of systemic liquidity and low-interest rates. Back then, investing in risky assets made sense for individuals with extra money. That holds true not just for cryptocurrencies but also for other hazardous investments like high P/E stocks, which are frequent favorites in the technology sector. Cut to the present, when the crypto market is experiencing issues as liquidity becomes more limited. The system-wide pressure for withdrawals has undoubtedly contributed to the demise of well-known companies like FTX and Celsius.
Although gold prices tend to rise during periods of rising inflation, this association has weakened recently. Even though there was no inflation during the previous five years, its worth increased. As a newcomer to the market, cryptocurrency is just now dealing with its first inflationary macroeconomic environment, in contrast to gold, which has been tested over a millennium. It needs to stabilize since its promise is still unrealized. Just put, five years is simply not long enough to determine whether it is an effective inflation hedge.
Cryptocurrencies are not supported by any government, with a few infrequent experimental exceptions. At the very least, some stablecoins are linked to money or good. Stablecoins backed by gold, for instance, mirror other gold-linked assets like derivatives or ETFs in certain aspects. Another option to access gold without owning it physically is through the tokenization of gold into stablecoins. Some people think their money may be safer using blockchain technology. Indian investors are already aware of this idea thanks to the Reserve Bank of India’s Sovereign Gold Bonds.
There is a contentious discussion among crypto fans about how much regulation and protection would benefit the sector. To further grasp this, let’s revisit the Binance / FTX issue. FTX has declared bankruptcy, but Binance seems to be in a more secure position. However, a distinct pattern has emerged. At least in part, FTX’s failure to satisfy liquidity requirements was the cause of its demise. Binance may not experience this, but it will still be impacted by the FTX repercussions because it only takes a few bad apples to damage the reputation of a whole industry.
system. The entire occurrence has increased the level of uncertainty in all digital assets. The Key is risk management Every time there has been a crisis, like the housing meltdown in 2008, it has all come back to the investments not being adequately hedged. The fact that cryptocurrencies are new is not the reason FTX is declaring bankruptcy today. Its failure to adequately hedge its investments and adhere to the tenets of sound risk management is the reason it is failing. Risk reduction is
Regardless of the asset, you are investing in, this is a tried-and-true activity. You will always be in danger if you don’t manage risk properly, especially when markets are as unpredictable as they are right now.
Since digital assets like stablecoins have numerous benefits, the sector as a whole will survive the current cryptocurrency crisis. Additionally, cryptocurrency has a significant impact on India’s underbanked population.
In addition to a low-interest rate environment that encouraged speculation, the fact that most of it is unregulated and there are no middlemen involved is what attracted people to cryptocurrencies. In fact, those very factors are now working against it.
Recent events have also shown that digital assets require protection in order to preserve liquidity and give investors confidence that they are secure. Regulating the bitcoin market will increase confidence, which will therefore increase adoption and, ultimately, liquidity. These indicators, along with systemic maturity, will help us understand just how “inflation-proof” this asset actually is.
