On regulating Cryptocurrencies: Bubble in the air

News: Crash in the Crypto market is yet another signal that retail investors are better off investing in this speculative asset class.

Moreover, it also highlights the need for regulation of Cryptocurrencies, without which the retail investors will have no protection from scams.

Crash in the Crypto market

Bitcoin, the most popular cryptocurrency, has lost over two-thirds of its value since its peak in November last year and has wiped out many retail investors.

Other cryptocurrencies have witnessed even larger losses, with some (Luna) plunging to zero.

Why Cryptocurrencies became widely popular?

Cryptocurrencies were initially touted to be alternatives to fiat currencies.

Since the supply of a lot of cryptocurrencies is limited by design, investing in them seemed like a good way to protect one’s wealth from inflation fuelled by central banks.

But as it became obvious that cryptocurrencies have had very little acceptance as money, crypto-enthusiasts began to argue a slightly different case.

Cryptocurrencies were now touted as an independent asset class like gold and silver that could serve as an effective hedge in times of crisis.

The crash in the crypto market has put to rest the argument that crypto, as an asset class, is as good a hedge as precious metals.

Easy monetary policy adopted by central banks has also kept cryptocurrencies rallying despite concerns about their fundamental or intrinsic value.

Easy money from central banks fuelled the rise of a get-rich-quick industry that depended on selling to a greater fool.

Just as Internet stocks and tulip bulbs were the hallmarks of liquidity-fuelled bubbles in the past, cryptocurrencies are the leading symbol of the current bubble in markets.

Way foward

Governments and their central banks have been largely unwilling to recognise cryptocurrencies as a legitimate investment asset.

They are also unlikely to recognise private cryptocurrencies as they infringe on the state’s fiscal and monetary authority.

Yet, to protect retail investors, a proper regulatory framework may help in protecting them from outright scams.

Source: This post is based on the article “Bubble in the air” published in The Hindu on 18th June 22.

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