Two economists of the french central bank estimate that the figures and events from 2022 allow to confirm the risks specific to the cryptocurrency and to demonstrate its instability.
What goes up, inevitably comes down. This is the cycle followed in 2022 by the crypto-asset market After a record-breaking 2021. This finding, economists at the Banque de France also do so.
In a bill of the Eco Notebook of the central bank, they estimate that the market has made over this period the proof of “its instability”.. And this has had consequences for investors, including some “individuals looking for a high return”.
High volatility and losses for investors
The development and high volatility of this market have led to an increase in risks and losses for players and investors,” analyze the authors of the BoF.
After a peak valuation of almost $3 trillion in 2021, cryptocurrency prices plunged by 60% the following year. One reason for this drop is the sharp decline in Bitcoin – whose price still remains higher than the beginning of the bull-run in 2020.
Bitcoin, the main crypto-asset, lost 66% of its value over the year, generating significant latent or real losses for 50% of investors by the end of 2022″, economists figure.
Correlation between crypto and TradFi
Several factors are invoked to explain this shift in bear marketincluding the rise in interest rates. This has had the effect of reducing “the attractiveness of crypto-assets, previously supported by a search for higher returns.
Another finding, according to them, is that the decorrelation between crypto-assets and traditional markets has become volatile due to the development of their democratization among investors, especially to diversify portfolios.
Since “March 2022, the correlation between crypto-assets and major US equity indices (Nasdaq, S&P500) has risen sharply to a peak of 85% in May 2022.”
A “danger” reported as early as 2013
The institutionalization of crypto was sought after as a source of growth. However, it also has a downside, starting with its correlation with traditional finance.
But the crisis of 2022 is also due to bankruptcies and the strong interconnection of the players of the crypto. The Bank of France pinned on this title “the lack of transparency and control”. These events resulted in a loss of confidence and the withdrawal of a part of the investments.
For the BdF, and despite the absence of contagion to the rest of the economyThese incidents have confirmed the need for an appropriate regulatory framework. Its representatives also recall that the institution was warning about the risks, the “dangers” even, of cryptos back in 2013.
The solution, especially in terms of investor protection, therefore requires the establishment of a new framework, the current one being “insufficient”. The supervision of the market thus requires, among other things, a “cooperation between jurisdictions”.
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