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One of the major arguments I have been making about the growing importance of cryptocurrencies and other digital formats is that “finance” is nothing more than information and information is going to grow and spread throughout the world. We are going through a transition period right now.
There are a lot of uncertainties about what is happening or what is going to happen in the transition and there are a lot of uncertainties about what kind of a financial system is going to result from the transition.
Over the past weekend, we got a good picture of how all the financial world fits together. Investors need to pay attention to situations like these and see how they fit into their picture of the investment world.
Eva Szalay, writing in the Financial Times, explains how the digital asset markets are becoming more and more entwined with more traditional financial markets and traditional financial investors.
The price of the biggest cryptocurrency by market value tumbled $10,000 in just 60 minutes in the early hours of the London morning on Saturday to hit $42,222, according to the FT Wilshire blended bitcoin price index that tracks trading on leading crypto exchanges.”
“The 20 percent flash fall came just hours after the close of a volatile week on Wall St. in which stocks and bonds moved sharply in response to potential shifts in monetary policy and the spread of the new strain of coronavirus.”
(I have just written about these moves on Seeking Alpha.)
Crypto’s weekend shock suggests this typically somewhat separate market is becoming more closely tied to those traditional assets, particularly now that big institutional investors are more involved.
Saturday’s action “started as a risk off move in traditional macro circles [which] triggered some liquidations in crypto.” More than $2.5 billion worth of bets went sour. This initiated “the first massive liquidation event since September.”
Selling pressure from professional investors led to the clear-out of bets on exchanges such as Binance.
And, Ms. Szalay goes on, Bitcoin is seen as one of the safer cryptocurrencies. What the weekend showed is Bitcoin is still vulnerable to “jitters” experienced within the whole marketplace. And this is the point, one that we will be reminded of more and more as the transition to the “new” financial structure takes place.
Information and information goods, grows and spreads. History has shown that although some may attempt to stop the movement, all that they can do is slow it down. Somewhere, the evolution will be continuing. On Wednesday morning, Bitcoin was trading around $51,000.
Well, the traditional markets and the new cryptoasset markets cannot be kept separate. Financial markets are going to intersect and they are going to experience money flows back and forth between each as the economics of the situation changes.
This brings up a real dilemma for the regulators. How do the regulators respond to this situation? Well, in the United States, the response has been slow. Paul Kiernan, writing in the Wall Street Journal, gives us a glance at what the regulators in the United States are going through.
Today, on Wednesday, the chief executives of six cryptocurrency firms are appearing before the U.S. Congress. The issue? How to bring the more than $2.0 trillion market under government oversight.
For one, the lawmakers don’t really understand cryptoassets and “how the sector fits into existing regulations.” Mr. Kiernan states the truth when he writes, “Oversight of crypto markets is spotty in the U.S.” And, I would argue that this “spottiness” is not just due to the fact that financial regulation is split among federal and state agencies.
But, you do have the reality that the two largest cryptocurrencies by market cap (Bitcoin and Ethereum) are considered by many experts to be commodities rather than securities. If this is the case, then they need to be regulated by the Commodity Futures Trading Commission and not by the Securities and Exchange Commission.
Gary Gensler, Chairman of the SEC, is quoted as confessing, “There are gaps in our system.” And, there are many, many questions that must be answered.
Furthermore, the discussions don’t even get into an area like “non-banks.” You think that just focusing upon the cryptocurrency space is important. The Bank for International Settlements estimates that nearly half of all financial assets belong to the “non-bank sector.” This sector is, “at best,” poorly regulated. For one, the transparency in this sector is appalling.
But, secondly, there is little or no micro-regulating of this area. The most the regulators can impose upon the sector is macro-influence like the fact that the Federal Reserve stepped into the empty space around these organizations during the financial disturbances resulting from the spread of the Covid-19 pandemic and subsequent economic recession and provided needed support to help many institutions through the period.
And, many of these organizations have digital facilities that are also pushing the edge of the technology. These non-banks are not independent in the marketplace from either the “bank-banks” or from the cryptocurrencies. They all go together. And, this togetherness is just going to increase.
The technology is bringing all things together. Investors need to understand this. We are going to see more events like the major drop in Bitcoin prices over the past weekend. And, there will be other disturbances in other areas of the financial markets as we move into 2022 and beyond.
Funny that many of the “believers” in cryptocurrencies and cryptoassets toasted their creation and evolution because they wanted to see currencies and other assets that were not dominated or controlled by a central authority.
Well, what we are seeing is that in a working market system, these cryptocurrencies and cryptoassets cannot exist independently of the rest of the financial system. The markets interact, as markets should. This is important to realize as we build our investment strategies.
But, this means that legislators and regulators and policymakers are going to have to get involved in the evolution of the systems and help bring transparency and stability and trustworthiness to the financial markets. Investors need to understand this possibility.
If the legislators and regulators and policymakers in the U.S. don’t get to work, other countries or regions of the world are going to achieve the trust and stability and transparency that is needed in a financial system that leads the world.
Investors, also, need to understand this possibility as well. In my view, for the U.S., the time to move is now!
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Crypto: A Growing Part Of The World – Seeking Alpha
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