Krypto loses his hedge role

The big question that is currently on everyone's lips on the cryptocurrency markets is: Where will this strong sale end?

In addition, many people wonder what happened to the alleged zero correlation between crypto and traditional assets - the idea that Bitcoin and other currencies offer protection against the decline of securities such as stocks and bonds. They point out that we have seen how crypto and stock markets have recently collapsed in view of the same macroeconomic headwind. Are these markets correlated?

A fluence in quality takes place in times of economic uncertainty in which investors re -align their portfolios and change from volatile assets (high risk, high returns) such as shares to low -risk, lower reinforcing assets such as bonds or cash.

Even before the recent turbulence, the correlation between Bitcoin, the leading cryptocurrency, was not zero, but it was low to medium.

Investigations show that this relationship has now moved into a very positive correlation from 0.5 to 0.8 in mathematical terms. In fact, Bitcoin falls today when the share prices fall.

What did this sudden change cause and what does it mean for investors? I think Bitcoin as an uncorrelated investment class is clearly a victim of his own success. In the last 12 to 18 months we have experienced a strong increase in institutional capital, which has flowed into digital assets.

A study from 2021 of the Fidelity digital assets showed that 70 percent of the institutional investors surveyed expected to buy digital assets in the future, and expect more than 90 percent of those interested in digital assets to have an allocation in their own systems within the next five years.

An investment option that was originally driven by innovative small investors has now become a mainstream and is therefore subject to the same market fluctuations as other risky systems. This means that these institutional buyers buy and sell crypto because they are other risky investments.

As long as the institutions remain involved, there is every chance that this relationship will remain - crypto will remain correlated with risky assets. It is unlikely that in times of economic uncertainty it is a coverage against stocks.

It is worth noting that there are thousands of different crypto tokens and not all are born the same. The majority of the structured investment products-and indices used by institutional investors are based on "Blue-Chip" systems such as Bitcoin and Ether, the greatest cryptoma market for capitalization.

In times of high volatility, it is advisable to switch to more stable systems. Within the crypto ecosystem, for example, an investor can exchange a volatile token into a stable coin that enables the owner to have his capital for a real asset such as a Fiat currency, including US dollar, pound and euros, or a precious metals such as gold.

But if an escape to safety is intended, why then continue to use crypto instead of moving back into cash where it is guaranteed in a bank?

A good reason is that you have your crypto stocks work for yourself in terms of achieving a return by lending the stable coin via a platform. These platforms can be centralized (operated by a core team) or decentralized - constructed and serviced by a community of core actors - and you can offer a significantly higher return on a loan - about 10 percent per year for StableCoin - as a traditional bank.

While this is theoretically okay, a big problem in the recent market turbulence has occurred in the recent market turbulence with the collapse of a stable coin called VAT-the stable coin that is bound to the US dollar is an algorithm-based token that is located in Terra Blockchain.

also Celsius, a crypto loan platform with a fortune of over $ 20 billion, has frozen the withdrawal of stable coins by customers due to liquidity difficulties.

As with investing in any other asset, the implementation of your own diligence is of the greatest importance to understand the associated risks.

Unfortunately, most of the industry is unregulated at this point and the protection that we take for granted when buying financial services is generally not offered in the crypto world.

This changes because both governments and financial services supervisory authorities recognize the acceptance and importance of promise that brings the technology of broader society. In the United Kingdom, the Financial Conduct Authority is developing new guidelines and guardrails to protect consumers.

But in the meantime, investors are largely on their own when they are completed with drastic price declines and the pressure, which now threatens the financial stability of some individual crypto companies.

You are also exposed to the risk that market turbulence reveals more about the cryptes active on the cryptoma markets, as is often done in difficult times in the financial world when liquidity suddenly disappears.

As with any risky asset should not invest more than they can afford to lose

Investments in crypto can be made as long as they are sensible and follow guidelines on how to avoid fraud.

Investors should invest with caution. This new ecosystem is being developed in real time with many new products and services that are distributed over the Internet and can be used without restriction by everyone at any time.

openly, it is impossible to say at the moment whether the crypto world will go to zero and a financial disaster will follow. It is also impossible to say whether the prices will recover from the current lowstalls, as was the case after previous crypto sales.

As with any risky asset, investors should not invest more than they can afford to lose. And if you are careful, you should only keep crypto as a small proportion of a diversified investment portfolio.

regulatory authorities and political decision -makers rightly focus on protecting consumers from damage and ensuring financial stability.

However,

shocks of this kind can lead to a reactive political design that can have unintentional consequences. As the British government said, Fintech has a great future in Great Britain. And crypto is a core component of FinTech. It is therefore of crucial importance to recognize both the advantages and the risks of crypto and to pursue a proportionate and balanced approach to regulating the sector.

Ian Taylor is the managing director of Cryptouk, the trade association