Has the China crackdown and Elon Musk turned you off crypto?

Confused about cryptocurrency? You’re not alone. From Bitcoin and Ethereum to Dogecoin, the hype surrounding crypto has spread to all sectors of society.

One can think of crypto currencies as arcade tokens or casino chips – you need to exchange real currency for the cryptocurrency to access the good or service. They can be exchanged online for goods and services, and many companies issue their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides.

There are around 6,700 different cryptocurrencies which are being traded publicly around the globe. And while it may seem lucrative, this new form of currency doesn’t come without risks.

Just last week, Bitcoin, one of the world’s most well-known cryptocurrency dropped by as much as 30%, following a string of negative headlines from Tesla CEO Elon Musk to a new round of regulations by the Chinese government.

The Chinese government crackdown on banks’ use of cryptocurrencies accelerated a long-predicted sell-off, in a day of chaotic trading. As the world’s largest digital currency, Bitcoin tumbled to about $30,000 (£21,000) amid frenzied trading, a drop of over 50% since it hit record highs of more than $64,000 in mid-April.

Jonathan Galea, Managing Director of Blockchain Advisory Ltd, said that as with any other investment, people should only invest what they can truly afford to lose, insisting one should at least understand the basics before dumping money into the venture.

“For example, in the case of Bitcoin, we are talking about decentralised money without any responsible centralised issuing or governing entity. If you cannot grasp the power of such an elementary concept, then it’s best to steer elsewhere, as otherwise the high volatility of the market will drive you to despair just as much as it has a chance to take you to euphoric highs,” Galea said.

He said that like other investment opportunities, the majority of people getting into crypto do not have sufficient knowledge on the subject.

“I’d say that’s the case for most other investments really – the vast majority of the people investing, the so-called retail investors, would not have a firm understanding of the asset or project they are investing in, and naturally that puts them at risk,” Galea said.

He said understanding the fundamentals of a project, that is understanding the problem at hand, and the solution that the crypto project proposes, is important in order to make the right calls and be confident about them.

The Malta Financial Services Authority said that whilst all investments carry an element of risk, crypto currencies carry a high risk and puts investors’ capital at risk.

“The MFSA would like to remind consumers of financial services not to enter into any transaction unless they have ascertained that the entity with whom the transaction is being made is authorised to provide such services by the MFSA or another reputable financial services regulator,” it said.

Crypto sceptics would argue that it is just a fad.

“Most crypto tend to die out after a while, either due to lack of usage, or cyberattacks, or their creators end up running away with the investors’ funds. Are crypto in general a fad? Definitely not. We’re witnessing the creation of a new financial system, one which will shake the grounds of traditional financial frameworks,” Galea said.

He said people are just starting to understand how crypto works.

“The total market cap of crypto is over $2 trillion at the time of writing, and institutional investors are dipping their toes in. People have started understanding Bitcoin’s simple existence as “sound money”, and Ethereum’s potential to power a whole new decentralised finance system.”

But the market is still in its infancy according to Galea, who said that the effects of notable celebrities like Elon Musk tweeting and raising crypto prices shows there is a lot of room for it to grow further.

“Such a degree shows that the market is still in its infancy, and has a lot of room to grow further. If one wants to understand the true nature of the industry, then one needs to look beyond the noise generated by people who have only heard about crypto a few weeks ago. Most of the successful crypto projects that we’re seeing nowadays have been built in silence during the bear market spanning 2018 – 2020, in which crypto prices plunged by as much as 95% in some instances.”

On the pandemic’s effects on the crypto market, the MFSA said that while no global study has been carried out the future of the sector is promising. “We are seeing a global trend towards harmonised regulatory frameworks such as the Market in Crypto Assets proposal by the EU commission.”

Galea said that pandemic restrictions led to a surge of interest in crypto.

“In fact, the turn of the tide in the bear market affecting crypto happened at the beginning of summer last year, with the current bull market still going on strong,” he said. “Will it be long-lived? That, unfortunately, is an answer that no one can provide!”

Or else, take the sharp criticism of the Bank of England governor, Andrew Bailey, who has warned that investors should be prepared to lose all their money if they dabble in cryptocurrencies. Even the European Central Bank thinks so, comparing bitcoin’s meteoric rise to other financial bubbles such as “tulip mania” and the South Sea bubble, which eventually burst in the 17th and 18th centuries.