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Risk It For The Bitcoin: Has BTC Matured To Be ...

With stronger correlation comes greater risks for Bitcoin, according to IMF experts. The growing interconnectedness between crypto and equity markets would permit the transmission of shocks that can destabilize financial markets. Noting that crypto assets are no longer on the fringe of the financial system, the authors summarized:

Risk it for the Bitcoin: Has BTC matured to be ...


While the outlook for Bitcoin and the cryptocurrencies markets is in a very positive space, there are still prevailing risks associated with investing in the space. The cryptocurrency market is still in its infancy and, as highlighted above, some areas still need to be addressed before Bitcoin and other cryptocurrencies would truly become tried and trusted long-term investments.

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Risks remain that these buyers may be sensitive to any downside volatility. However, the degree of accumulation that appears to have taken place during this consolidation range, especially in the face of world changing macro and geopolitical risks, is truly a signal of strength and conviction in Bitcoin.

I believe MicroStrategy Incorporated (NASDAQ:MSTR) to be a sell. I incline towards this view as I weigh the risks to be far too significant for investment in the stock to remain sustainable in the long term. The bearish Bitcoin (BTC-USD) movements, if they continue in this manner, could push the company dangerously close to bankruptcy. Moreover, even if Bitcoin stabilizes, the company's deteriorating software segment performance adds to the MSTR's unsustainability.

The stellar growth, volatility and financial innovation currently seen in the crypto-asset ecosystem, as well as the rising involvement of institutional investors, show how important it is to gain a better understanding of the potential risks that crypto-assets could pose to financial stability if trends continue on this trajectory. Systemic risk increases in line with the level of interconnectedness between crypto-assets and the traditional financial sector, the use of leverage and lending activity. It is important to close regulatory and data gaps in the crypto-asset ecosystem to mitigate such systemic risks.

Crypto-assets are currently the subject of intense policy debate. The different segments of crypto-asset markets include unbacked crypto-assets (such as Bitcoin), decentralised finance (DeFi) and stablecoins.[2] Crypto-assets lack intrinsic economic value or reference assets, while their frequent use as an instrument of speculation, their high volatility and energy consumption, and their use in financing illicit activities make crypto-assets highly risky instruments. This also raises concerns over money laundering, market integrity and consumer protection, and may have implications for financial stability.

Despite the risks, investor demand for crypto-assets has been increasing. This exuberance stems from, among other things, perceived opportunities for quick gains, the unique characteristics of crypto-assets (for instance programmability) compared with conventional asset classes, and the benefits perceived by institutional investors with regard to portfolio diversification. Major players in the payments industry have also stepped up their crypto-asset-based services, enabling easier retail access. While crypto-asset markets currently represent less than 1% of the global financial system in terms of size, they have grown significantly since the end of 2020. Despite recent declines, they remain similar in size to, for example, the securitised sub-prime mortgage markets that triggered the global financial crisis of 2007-08.

Risks to financial stability in the euro area stemming from crypto-assets were seen as limited in the past.[3] This special feature provides an update on crypto-asset market developments and a general overview of risks stemming from unbacked crypto-assets and DeFi, given the way in which they have evolved and their specific characteristics and risks. This article therefore abstracts from a specific discussion on risks and developments in stablecoins which, as shown by the recent TerraUSD crash and Tether de-peg, are not as stable as their name suggests and cannot guarantee their peg at all times.[4] Following a deep dive into crypto-asset leverage and crypto lending, we conclude that if the present trajectory of growth in the size and complexity of the crypto-asset ecosystem continues, and if financial institutions become increasingly involved with crypto-assets, then crypto-assets will pose a risk to financial stability.

The relevant authorities have ascertained that crypto-assets pose risks from an investor protection and market integrity perspective.[10] The European supervisory authorities have recently reiterated their warning that crypto-assets are highly risky and speculative. Crypto-assets are not suitable for most retail investors (either as an investment or store of value, or as a means of payment) who could lose a large amount (or even all) of the money they have invested. Consumer protection risks include (i) misleading information, (ii) the absence of rights and protections such as complaints procedures or recourse mechanisms, (iii) product complexity with leverage sometimes embedded, (iv) fraud and malicious activities (money laundering, cyber crime, hacking and ransomware), and (v) market manipulation (lack of price transparency and low liquidity).

The significant volatility of crypto-assets in recent months has not resulted in contagion or any notable defaults by financial institutions, but the risks of these are increasing. Greater involvement of financial institutions could fuel the growth of crypto-assets still further and increase financial stability risks. Any principal-based crypto-asset exposures on the part of systemic institutions, especially if the assets involved are unbacked, could put capital at risk, with potential knock-on effects on investor confidence, lending and financial markets if the exposures are of a sufficient scale. Financial institutions themselves could face reputational risks as well as climate transition risks. Some international banks (including euro area banks) are already trading and clearing regulated crypto derivatives, even if they do not hold an underlying crypto-asset inventory. Market intelligence suggests that other EU banks and financial institutions are interested in offering custody, trading and market-making services once regulatory uncertainty diminishes with the entry into force of the Markets in Crypto-Assets (MiCA) Regulation. This will further increase interconnectedness.

If current growth and market integration trends persist, then crypto-assets will pose a risk to financial stability. Unbacked crypto-assets can have financial stability implications through four main transmission channels: wealth effects, confidence effects, financial sector exposures and the use of crypto-assets as a form of payment.[11] While all these channels are increasing in size and complexity, they lack internal shock absorbers that could provide liquidity at times of stress. For example, the wider involvement of financial institutions or the use of crypto-assets as a form of payment would increase the potential for spillover to the wider economy, particularly if leverage were employed.

Significant informational and data shortcomings persist, hindering the proper assessment of financial stability risks. These shortcomings include not only quantitative issues but also the reliability and consistency of data, and the fact that a significant proportion of activities take place outside the regulatory perimeter. Most publications from crypto-asset service providers (including platforms, exchanges and data aggregators) are not verifiable and should be treated with caution, while the limited regulatory data currently available (e.g. data for derivatives and alternative investment funds) offer only a partial (and potentially inaccurate) picture. As long as there continue to be no official statistics on crypto-assets or reporting of underlying data to a supervisory or oversight authority, the reliability of the metrics from the above sources and the full extent of possible contagion channels with the traditional financial system cannot be fully ascertained.[12] This is particularly relevant for the assessment of the risks stemming from the use of leverage or the reuse of collateral in crypto lending. 041b061a72


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