The recent bankruptcy of crypto trading platform FTX highlights sent a shockwave through the crypto community, which has caused investors and regulators to pay increased attention. The call for supervision has been going on for some time, for example also from the Dutch central bank DNB, which has recently investigated cryptocurrencies.
Cryptocurrencies are seen as an alternative form of investment. A direct classification such as shares, bonds or currencies is not yet unambiguously possible. Price developments of cryptocurrencies are highly volatile and sometimes even spectacular. Cryptocurrencies have attracted new investors in recent years for a variety of reasons.
The cryptocurrency market is still young, and supervision, as exists in the rest of the financial sector, is not yet there. The way in which new money is created and has to be traded causes the need for other, new market parties. These new market parties sometimes take care of the cryptocurrency industry with different hats for multiple roles. As in other industries with startups, early success stories sometimes take capital interests in new promising companies. These capital interests are sometimes financed in an innovative way. There are financing structures in which mutual dependencies (can) arise.
At the now-bankrupt trading platform FTX, billions of dollars from clients have been used by owner Sam Bankman-Fried to enable investments from his fund Alameda Research. The trading platform had promised to have one against every coin deposited as well. That promise has been broken by lending attracted deposits to Alameda. Investors in FTX lost confidence when this became known, starting a wave of sales.
FTX is an example of interconnectedness between players in the cryptocurrency market that regulators such as the Dutch AFM and the European Banking Authority warn about. Terra, Celcius and Three Arrows are other recent examples of continuous problems due to interconnectedness in this supply chain. This interconnectedness also often makes a problem with one party greater than just that party and increases what is called systemic risk.
Is crypto all good then?
Digital currencies are not the same as “analog money”. There is no reserve to protect it, there is no link to a country’s economy. Nevertheless, digital currencies are real, but they behave differently. Spectacular movements attract curious people, often inexperienced in the field of investing. Despite the efforts of a few companies to treat digital currencies as a wallet, they are not. So there is confusion around the matter.
If you mean to familiarize yourself with digital currencies, please do not get ahead of yourself. Find the proper information and take baby steps. The expected oversight measures will, in time, improve reliability. Until then you are on your own. Missing out should not be feared all the time.