Crypto crash — good time for observations
Let’s shed light on what needs our attention and insights gathered from the current market environment. I’ve previously mentioned the fragility crypto tech currently balances on (safer measures are imperative) — hackers get to access different entry points to exploit the system. Terra’s case brings to our knowledge another large “liquidity black hole” which is not tech but a humanity issue — if the ongoing reddit theory is true (not confirmed but a rumour). Market makers (hint: same names, find out for yourselves) and traders’ manipulation tactics were the cause of breaking the UST $1 peg which led LUNA into a death spiral. All systems that have any observable or undetected loopholes will be found and exploited for personal gains — it’s how humanity functions. Stating the obvious, our objective clearly is to design systems with built mechanisms and better/ improved attack surface management.
Terra case…
If we examine the graphs from 2014 and 2018. Every bear market sees crypto plummet by 80% to 85% from its all-time highs. In addition, not breaking the previous bull market’s apex. May’21 crypto crash de-pegged UST to 85 cents, LUNA plunging 85%. Accordingly, there was strong community confidence that the protocol will survive. To analyse closely — in 2021 the system was $2bn and before the 2022 crash was $18.5bn. Growing value without a strong foundation is a spot for susceptibilities — a playground for wrong decisions. That’s what happened at Terra.
Reminder digital assets, comparatively newer technology is sort of still under construction, fast became known as a well-acclaimed engine of the financial market revolution. But as we all completely understand any financial invention is bound to show market abuse. Given unpredictability and ambiguity of regulatory advice, as well as the unique characteristics of these investment opportunities and their market structure, crypto’s particularly vulnerable to infelicitous behaviours that harm investors and markets. Should we get to fixing it already?
Not as simple as that…
Again as clear, new financial instruments tend to open new avenues for exploitation. Because crypto is still in its early/ nascent stages, there’s a need for synergies between the industry and regulators — encouraging market expansion while also safeguarding market integrity and investor interests. Firstly, the industry and regulators currently have differing opinions and judgments about the tech and its very use case — hence we are still far from well-defined policies. Furthermore, the fast-paced nature of digital assets, paired with rapid technological advancement, makes it more difficult for (old school) regulators to keep up with new disruptive schemes and manipulative behaviours. The positives to come out of this current case could be that we could contemplate an increase in both regulatory and monitoring steps to address market issues — considering the nature of the digital asset market and the emergence of institutional participants (also, an increase in the possibility for market manipulation).
Cryptocurrency exchanges operate independently of one another, resulting in a market that is relatively isolated. Allowing trade of the same digital asset on various exchanges, traders can place dummy orders on one exchange and complete the deal on another. Such market occurrence is hard to recognise in the absence of any common governing body, making cross-market surveillance almost unworkable.
And…
Because digital assets live on the web and are globally accessible, many governments have taken positions in their respective territories. Because authorities around the world have the choice to define digital assets differently, a complicated regulatory landscape has emerged. Besides this, the regulatory stance on cryptocurrency differs as we move across the globe, ranging from endorsement to caution to rejection — Singapore & South Korea, US & Europe and China respectively.
Crypto market monitoring has a long way to go…
To keep in mind, traditional investment instrument surveillance has evolved greatly in line with market manipulative practices in both exchange-traded and over-the-counter products. Surveillance of digital assets, on the other hand, doesn’t exist yet. Monitoring the behaviour of both known and undiscovered manipulative actions is more difficult due to the intricacies inherent in the digital asset market system. For example, an investor can have various accounts in different locations. Because there is no way to tell if accounts are held by the same person, tactics like spoofing or wash trading are quite common.
The next massive issue is the lack of access to personal user information (and the one I think might solve some big problems). To get an overview here, the technology that powers digital assets keeps track of transactions but keeps user data private. As a result, the effectiveness of digital assets monitoring and enforcement measures gets redundant since they fail to detect the market’s bad actors.
We don’t have the answers yet…
The adoption of digital assets has accelerated recently with institutional interest and retail investors for the primary reason of the availability of high-growth opportunities. But, we need the same momentum moving forward — markets should be transparent and we should be able to invest knowing we are safe.
