A woman walks past Bitcoin digital currency ATM shop in Marseille, southern France, on Jan. 8, 2021.NICOLAS TUCAT/AFP/Getty Images
Greed is contagious.
That’s the rational way to size up bitcoin’s wild and bumpy ride in recent months.
Crypto promoters, though, offer a more self-serving take. For them, news that institutional investors, such as Massachusetts Mutual Life Insurance Co., and American billionaires, including Paul Tudor Jones and Stanley Druckenmiller, are piling money into bitcoin is proof positive the cryptocurrency is primed for mass adoption.
America’s business elite can afford to speculate on a high-risk investment, but that doesn’t mean that ordinary people should follow suit. That’s why, during these miserable times when livelihoods are being lost, global regulators must take co-ordinated action to prevent retail investors from being burned by this latest iteration of the cryptocurrency craze.
It’s easy to understand the temptation. Bitcoin appreciated by more than 300 per cent last year, and briefly hit a new all-time high of US$41,958 earlier this month. But the virtual currency’s price has also taken wild swings in recent weeks, fuelling fears of an impending crash.
“If consumers invest in these types of product, they should be prepared to lose all their money,” Britain’s Financial Conduct Authority (FCA) warned in a statement last week.
Consumers, it said, should be wary of price volatility, product complexity, fees and promised returns that sound too good to be true. Not only is there a risk that marketing materials may exaggerate returns, they could also play down risks.
“There is no guarantee that cryptoassets can be converted back into cash,” the FCA added. “Converting a cryptoasset back to cash depends on demand and supply existing in the market.”
European Central Bank president Christine Lagarde also issued blunt commentary of her own last week. She called for global regulation, arguing that bitcoin is facilitating financial crime.
“For those who had assumed it might turn into a currency – terribly sorry, but this is a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity,” Ms. Lagarde said, according to a story in British newspaper The Sunday Times.
And yet that hasn’t stopped some banks from stoking the market mania over so-called digital gold. JP Morgan Chase & Co., for instance, has predicted that bitcoin could climb as high as US$146,000 over the long term. Its forecast feeds into the crypto industry’s claims that bitcoin will continue to compete with gold as a safe-haven investment. But given its wild price fluctuations, is it appropriate to suggest that bitcoin is a stable store of value?
Wall Street isn’t Main Street. And although bitcoin’s price volatility this month alone should be enough to shake retail investors out of their stupor, it probably won’t. Perhaps that’s why even long-time crypto bulls are urging international regulators to increase oversight of the market.
“There is sustained and growing interest in the likes of bitcoin from both retail and institutional investors,” said Nigel Green, chief executive and founder of financial advisory deVere Group, in a statement on Friday.
“These mainstream, normalized investor strategies demonstrate that cryptocurrencies must come into the regulatory tent and be held to the same standards as the rest of the financial system,” he added.
He’s absolutely right.
Crypto investors should brace for more trading turbulence over the coming months because U.S. regulators are contemplating a crackdown of their own.
The U.S. Department of the Treasury is proposing new regulations to stamp out illegal cryptocurrency transactions. Specifically, its proposal would require banks, exchanges and custodians to collect information about their customers’ crypto transactions, including the counterparties of those dealings.
Those financial players would also be required to report details about large transactions involving unhosted wallets to the Financial Crimes Enforcement Network. An unhosted wallet is a type of digital account that allows individuals to conduct anonymous crypto transactions.
The ability to transact anonymously is a big part of bitcoin’s allure, which means if the proposed measures are enacted, they could depress bitcoin’s value.
There’s already a growing chorus of predictions that bitcoin’s bubble will eventually burst. It’s obvious that regulators require more resources for fraud detection, enforcement and consumer education.
Some companies are doing the right thing and being upfront with consumers about the risks.
“When people sign up for crypto accounts with us, we send them an e-mail which tells them the 10 reasons why they shouldn’t buy cryptocurrency because it is a speculative, high-risk investment,” Michael Katchen, CEO of Wealthsimple, told the Society for Advancing Business Editing and Writing’s fall conference.
“What we advise our clients to do is if you want exposure to this, [there’s] nothing wrong with that. Do it with a trusted partner. ... And do it in a disciplined way so you’re not going to blow yourself up if the whole thing does fall apart.”
Chances are it will.
After all, many crypto entrepreneurs say their own investing strategy is “hodl”– slang for “hold on for dear life.” It’s time for regulators to take them at their word.
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