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Don’t let crypto mayhem spook retail investors

January 26, 2022, 12:20 PM UTC
People walk past a billboard in New York City advertising a digital asset.
Young people in markets as diverse as the U.S., the U.K., and India are choosing crypto as their first investment. Regulators must step in to protect them.
Noam Galai - Getty Images

The first month of 2022 has already demonstrated that this could be a different year from the previous two for global markets, especially for high-risk assets like cryptos. Regulators around the world need a collective approach to protect and uphold the interests of retail investors.

In the early months of 2020, central banks did not waste time cutting rates to make credit cheaper. The unrestricted flow of money in the global economy continued almost unabated in 2021, which triggered an unprecedented rally in stock markets, taking tech stocks such as EV leader Tesla (and even meme stocks like GameStop) to new highs.

It’s probably time for the Fed and other central banks to raise rates. Investors, especially seasoned institutional ones, have started to factor in the impending rate hikes as they place their bets for 2022, which has triggered a wide selloff in all riskier assets, including equities and cryptos.

What should worry markets the most

The S&P 500 index returned over 25% last year—no mean feat amid a pandemic that dealt a blow to the worldwide supply chain. The global stock market now faces several concerns, including the threat of the Omicron variant.

Concerns are part and parcel of the economy. Inflationary pressures compel central banks to raise rates. Investors then turn to safe havens, and the stock markets experience short-term outflows, which is all a cyclical trend. What’s new this time is the amount of money locked in the highly uncertain, speculative cryptocurrency market, complicating the entire scenario.

Three trillion dollars: This was the estimated market cap of all crypto assets, including Bitcoin, Ether, and a range of altcoins like Dogecoin at one point in 2021. However, the figure does not include the money parked in subsectors within the crypto ecosystem, such as NFTs and the so-called metaverse, where FOMO-inspired investors are purchasing virtual real estate at prices that dwarf even real-world property deals.

Earlier this week, this figure plunged to under $2 trillion, indicating that the crypto market may have entered a large-scale correction stage.

Young retail investors at risk

A survey in mid-2021 by Interactive Investor, an online investment platform in the U.K., found that nearly half of young Brits picked cryptos as their first investment. Worse, almost half of them used debt to place bets on these assets. It’s the same scenario cutting across economies, developed or emerging, including the U.S. and India.

Misinformation is rampant. A research report by the Financial Conduct Authority (FCA) found that most young crypto investors in the U.K. are unaware that these assets are not regulated. Despite all the hype around the launch of the first Bitcoin ETF in the U.S., many retail investors may not know how ProShares Bitcoin ETF expressly warns investors that the value of their holdings could decline to “zero.”

The ProShares Bitcoin ETF disclaimer can serve as immunity for the company, but what about young retail investors who seem to be buying based only on provocative headlines such as “Dogecoin can buy you Tesla merchandise”?

The fallout of any major adverse event

The world has had enough of high prices. Sooner or later, interest rates are likely to go up in almost every economy. What is more worrying than these cyclical events is the multitrillion-dollar bet on an investment asset, the value of which may “decline to zero” at any time.

Imagine the psychological impact such an adverse event in the crypto market would have on first-time investors. It could even trigger an exodus of young retail investors from the global stock market.

The time is not for a knee-jerk reaction like a blanket ban, but at least introducing a little rationality in the field. What’s the harm in preventing crypto exchanges from promoting their platforms through social media channels?

That Bitcoin returned 100% at one point in 2021 and another crypto, Solana, gave 10,000%+ returns to backers are the headlines that can alter the sentiments of even the staunchest crypto critics. That any crypto’s value can change radically overnight, and some like Squid Game’s token can vanish in a blink of an eye, are also some realities a retail investor must be aware of.

What makes sense

Amid all the frivolity, the Central Bank of Singapore has issued new guidelines to restrict manipulative trade practices by crypto trading service providers in the island nation. The purpose is to protect the interests of retail investors who may not fully understand the potential risks involved in crypto trading.

The rest of the world, especially the economies of the West, are yet to clear the clouds. The U.S. Senate may be discussing the risks posed by cryptos, but there’s no definitive action by the Fed or the SEC to protect retail crypto investors’ interests. The trillion-dollar infrastructure bill has an express mention of cryptocurrencies, at the risk of giving a sort of recognition, if not legitimacy, to these speculative assets. Big banks have started crypto trading services for clients, adding more glamour.

Even if one argues that cryptos are “futuristic assets,” there should be no harm in regulators adding checks and balances in crypto trading, which is riddled with excessive price fluctuations.

A unified approach

Almost every economy likely to be impacted in any significant upheaval in the crypto market is part of multilateral institutions, including the International Monetary Fund (IMF) and the World Economic Forum (WEF). A collective attempt by the heads of these countries or a statement at the first G20 finance ministers and central bank governors (FMCBG) meeting (to be held in Indonesia in February 2022) is what the world needs to preserve the interests of retail investors.

Now, murmurs and speculations that “crypto is dead” are echoing across Google searches and online forums. The prophecies of Warren Buffett and Sen. Elizabeth Warren are being looked back on amid the ongoing bloodbath in cryptos, after Bitcoin lost almost half its value compared to its peak.

More than an interest rate hike, a resurgence of the pandemic, or governments closing the stimulus taps, the sentiments of retail investors will likely decide the trajectory of the global markets in 2022 and beyond. The onus is on regulators to not let any major turmoil in the crypto market dent their morale.

Kunal Sawhney is the CEO of Kalkine Group.

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