Global markets have been on a tear since the US Presidential elections in early November but none as spectacular as the cryptocurrencies. In particular, Bitcoin soared over 50% in a little over month since the elections. For some of us wondering what’s the link between Trump and cryptos:
““My vision is for an America that dominates the future,” Donald Trump told a bitcoin conference in July. “I’m laying out my plan to ensure that the United States will be the crypto capital of the planet and the bitcoin superpower of the world.””
The article talks about the risks of crypto deregulation:
“The danger is not just that crypto-friendly regulation will expose millions of Americans to scams and volatility. The danger is that it will lead to an increase in leverage across the whole of the financial system. It will foster opacity, making it harder for investors to determine the riskiness of and assign prices to financial products. And it will do so at the same time as the Trump administration cuts regulations and regulators.
Crypto will become more widespread. And the conventional financial markets will come to look more like the crypto markets—wilder, less transparent, and more unpredictable, with trillion-dollar consequences extending years into the future.”
The article says that the regulations so far have kept the mainstream financial system insulated from cryptos but Trump is about to change that exposing the rest of the financial system to contagion risks from a crypto bust:
“It has prevented firm failures and crazy price swings from destabilizing the traditional financial system. Crypto lost $2 trillion of its $3 trillion in market capitalization in 2022, Kelleher noted. “If you had that big of a financial crash with any other asset, there would have been contagion. But there wasn’t, because you had parallel systems with almost no interconnection.”
Forthcoming regulation will knit the systems together….FIT21 makes the Commodity Futures Trading Commission, rather than the Securities and Exchange Commission, the regulator of most crypto assets and firms and requires that the CFTC collect far less information from companies on the structure and trading of crypto products than securities firms give the SEC.
Beyond loose rules, financial experts anticipate loose enforcement. The CFTC predominantly oversees financial products used as hedges by businesses and traded among traders, not ones hawked to individual investors. It has roughly one-fifth the budget of the SEC, and one-seventh the staff. And in general, Washington is expected to loosen the strictures preventing traditional banks from keeping crypto on their books and preventing crypto companies from accessing the country’s financial infrastructure.”
Furthermore, with the inherent speculative tendencies of retail investors, crypto poses signficant risks to personal finance:
“Simple volatility is the biggest risk for retail investors. Crypto coins, tokens, and currencies are “purely speculative,” Prasad emphasized. “The only thing anchoring the value is investor sentiment.” At least gold has industrial uses. Or, if you’re betting on the price of tulip bulbs, at least you might end up with a flower.
With crypto, you might end up with nothing, or less. A large share of crypto traders borrow money to make bets. When leveraged traders lose money on their investments, their lenders—generally the exchange on which the traders are trading—require them to put up collateral. To do that, investors might have to cash out their 401(k)s. They might have to dump their bitcoin, even in a down market. If they cannot come up with the cash, the firm holding their account might liquidate or seize their assets.”
The article goes on to highlight other risks from crypto including geo-political.
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
MORE FROM Jan WEEK 3
MORE FROM Jan WEEK 3
