What risks do virtual currencies have for individuals? Markets

At first, bitcoin, today the king of cryptocurrencies, was seen as an almost anecdotal phenomenon that only aroused interest among a few investors. But that has long since changed. Although it already had its first moment of fame five years ago, when it registered notable price increases, it was not until last year that it attracted the attention of the general public again in the midst of a strong revaluation that raised the price of the currency by 305 % in 2020. The climb continues in 2021 and has already risen 100% since the end of December.

As the price picks up, so does the interest in the currency, almost exponentially. Including the one shown by the authorities. In recent weeks, market supervisors such as the Spanish CNMV, the British FCA or central bankers of the stature of Jerome Powell, the president of the US Federal Reserve (Fed), have intensified their warnings about the strong speculative component of bitcoin and the high risks involved in investing in this volatile asset. And the message of all the organizations that monitor, with their virtues and their defects, for the proper functioning of the financial system is unanimous in warning that whoever invests in bitcoins may lose all their money.

Fed Chairman Jerome Powell has been one of the latest authorities to charge against bitcoin and other digital currencies. For starters, Powell prefers to use the term “crypto assets” rather than “cryptocurrencies.” “They are very volatile and therefore not really useful as a reserve security, they are not backed by anything and they are an asset for speculation and not a means of payment.” Powell went further and when referring to stable exchange rate cryptocurrencies, those whose credibility is based on a traditional currency, and observed that “they will have an important role with the pertinent regulation, but that role will not be to form the basis of a new global monetary system ”.

Herminio Fernández, CEO of cryptocurrency payments platform Eurocoinpay, does believe that supervisors and central banks remain vigilant because they see that new competition has arrived. “I see two financial systems here. One that is the usual system that, although it is also developing digital currencies, is going to be as it is until now. And on the other hand, the system generated around the blockchain. The latter is decentralized and is gaining in popularity among people and companies ”. According to Fernández, the possibilities offered by the blockchain world and the payment networks that are emerging are making it easier for anyone at the click of a button to send and receive money in a matter of seconds.

Joaquín Rivera, an economic analyst at Arcano Partners, also points to the competition posed by crypto assets. “The uncomfortable reality is that central banks face competition from national and international technology, threatening slow and expensive settlement and clearing systems, but we do not see in any case that cryptocurrencies that are not issued by central banks threaten to the current currencies, hence they have not been regulated yet ”, explains the expert.

Therefore, bitcoin emerged as a kind of alternative to the use of traditional money – attractive in many cases for money laundering – and found in blockchain technology the necessary ally for its development. But its use as a means of payment has barely penetrated, although it has increased the pressure on central banks to get down to work to launch their own digital currencies. In practice, the actual uses of bitcoin are almost testimonial, like the announcement made by Tesla that its electric cars can be bought in the US with bitcoin.

Financial risk?

Although they are not considered a risk as such for the financial system, since cryptocurrencies are far from having spread as an alternative means of payment, they are perceived by regulators as a threat to small investors. Lured by aggressive marketing campaigns and the promise of quick returns, market supervisors are eager to advise caution.

In mid-January, the British FCA said it was aware that some firms are offering investment or loan services in crypto assets promising high returns in return. “Investing in crypto assets or making loans with them generally implies assuming a very high risk. If consumers decide to invest in these types of assets, they should be prepared to assume the loss of all their money ”.

In Spain, at the beginning of March the law that governs the financial market was modified so that the CNMV can supervise each advertising campaign for crypto assets. The head of the supervisor, Rodrigo Buenaventura, said last week that in this type of product the price formation is not transparent and involves a high speculative component that can even lead to the total loss of the investment.

The reasons for the rise

Bitcoin is a market with peculiar characteristics. First, because of its relatively small volume compared to its total value. According to data from Bloomberg, the total market for bitcoin was worth around $ 1.1 trillion on Wednesday. On Thursday of the previous week, the price fell 3.79% while the actual transaction volume, according to Bitwise data, amounted to about $ 11 billion. This photo shows that with very little volume it is possible to generate large price swings. Strong hands are stronger than usual in these types of assets.

If five years ago the argument to sustain the value of the currency underwent a possible revolution in the world of payments, practically completely abandoned the possibility of it becoming an extended means of payment due to its volatility, the thesis for the The rise in prices is now due to the increase in institutional investment and what, according to different experts, is perceived as a new alternative for the construction of portfolios. Not surprisingly, the current environment of low interest rates and abundant liquidity is the perfect breeding ground for increasing risk taking.

Indeed, institutional investment has grown with renowned companies such as Tesla betting on allocating money to purchase the asset. However, last Wednesday, according to data from Bloomberg, the total value of all investment funds and listed products based on bitcoin amounted to 47,376 million dollars. That is, 4.3% of the market in the hands of professional investors.

Rivera recalls that money is money if it fulfills three functions: “Accumulate long-term value, if it acts as a means of payment and if it is a way of counting. Bitcóin does not strictly comply with two of the three. It is not really useful as a store of value due to the volatility of 80% when the normal is 4%, it is not a means of payment for the high transaction costs derived from energy costs, and it does comply as a unit of account, but remember that a loaf of bread of one euro is worth 0.000021 bitcoin, so it does not fully facilitate economic calculations “. “The current moment is one of extremely high macroeconomic uncertainty and there are few assets that fulfill the functions of” risk hedging “, such as gold. Hence, the demand for cryptocurrencies is skyrocketing right now, “he continues. But despite the temptation that Bitcoin poses to many managers, prudence dominates.

Vincent Vinatier, Fintech and Finance Portfolio Manager at Axa IM, says that his company is not particularly supportive of cryptocurrencies in general. “From my point of view, bitcoin is not an investible asset: there are no cash flows, no residual value, no use value, and it is too volatile to be used as a means of payment. In our opinion, it is a speculative asset that could be worth $ 10 or $ 10 million ”.

“It will have to transform the potential into results to sustain its value proposition,” they add from Deutsche Bank, where they highlight the parallelism between bitcoin and Tesla.

Are there scams?

Absolutely yes. And it is a great risk to consider. The blockchain network on which bitcoin is based has not been hacked, but there have been many thefts and scams on the platforms that offer services in this market segment. From creating firms or crypto assets out of nowhere to later disappear with all the investors’ money, to sophisticated Ponzi schemes camouflaged as innovative technological solutions, also going through thefts on exchanges, cryptocurrency trading platforms. In the absence of a regulation, which in the European case is in process but will take some time to arrive, caution is the great wall that stands between investing or being scammed.

“When you are going to make an investment, either in cryptocurrencies or in another asset, the first thing to do is to know well the asset you are considering entering, because money costs a lot to earn and it is easy to lose it. Second, you have to see that the platform through which you are going to buy bitcoin is really safe. Know that there is an authentic company behind it, that this company exists and that later, once you buy that digital asset, you have the possibility of taking it to a virtual wallet only controlled by the investor, having in his possession the private keys and the public. You must never believe in proposals from people who promise returns of 2% per week or 20% per month because they are scams ”, recommends Fernández in this regard.

Population by geographies

The bitcoin fever has echoes in practically every country in the world, but it is more intense in some than in others. Herminio Fernández reflects on this, “for example Argentina, Colombia, Italy, Greece, Portugal or Spain are at the forefront of using digital assets.”

The expert considers that the explanation is a sum of factors. On the one hand, they are countries where financial information is not as widespread among the population and, therefore, calls for caution were not perceived in the same way as in other countries. On the other hand, some of them are countries in which traditional currencies have failed in their mission, either due to high instability or due to strict blockages of capital movements, such as China. The underlying idea is none other than that when the traditional system fails, loopholes open for cryptocurrencies to enter.

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