In case you’ve been too occupied by Trump, Irma, Harvey or Kim Jong-un, you may not have noticed but the cryptocurrency market has been on a wild ride.
The entire cryptocurrency market dropped by 47%, nearly $80b, over a two-week period before rebounding nearly 25% within 24 hours and nearly 35% within 3 days.
What’s behind the volatility? Jamie Diamond certainly fueled the fire by calling Bitcoin a fraud. Of course, Jamie also called the infamous London Whale trade a tempest in a teapot and that eventually resulted in a loss of some $6.2b and a fine of nearly $1b, but who’s counting? After the dust settled, Mohamed El-Erian offered a more balanced perspective on what’s driving the volatility.
China’s recent crackdown on the ICO market and trading Bitcoin on exchanges is the main culprit behind the sell-off. ICOs had become especially frothy and raised concerns of fraud, justifiably so given the lack of regulation and structure of these deals where investors were basically betting on an idea without a product in site in many instances.
So here we see a perfect storm where a frothy market (Bitcoin and Ether were up over 400% and 4700% YTD, respectively, before the sell-off) runs into regulatory action in China and a public hazing from perhaps the most prominent banker in the world. Given the huge run these markets have had this year, profit taking was in order.
The irony of regulators and bankers raising concerns about losses harming investors is especially rich in light of the 2008 financial crisis. More likely, given all of the coordinated efforts of central banks to reduce volatility in financial markets, having an unregulated, decentralized market beyond their control must be worrisome indeed.
If you can stomach losing more than half your money, keep your seatbelts fastened and enjoy the ride. Maybe you will get out with a nice profit before the bubble bursts, or not.
Fortunately, Red Swan Risk has perfected the tools, consultancy, and best practices that prepare our clients for the unknown.
Contact Red Swan Risk today for a demonstration of our efficient solutions for these challenges and more.
today for a demonstration