The collapse of the crypto and the hard lessons for young investors

Many young traders reported large losses after the collapse of the cryptocurrency luna for $ 40 billion, writes the Financial Times.

Subaya, 29, entered the crypto world last year after seeing his friends make money from him. The Bangalore IT employee watches online tutorials from influential people, starts trading various tokens, and earns enough to dream of quitting his job and engaging in full-time trading.

His early success gave him the confidence to borrow money through credit cards to increase his stakes. Encouraged by the prospect of a 20% return, he moved his entire $ 7,000 portfolio to the moon – leading to a $ 150 drop after the token price plummeted this month.

“I thought I could easily make money,” Subaya said. “I never thought about reductions, that everything could evaporate to zero,” he added.

The IT expert is not only losing his money – the credit card debt continues to remind him of the risk he could not afford to take.

“Be prepared to lose all your money,” UK regulators warn. Why then are such cases a surprise?

Financial regulators are still looking for ways to meet the growing challenges, but there are also serious questions about platforms that allow cryptocurrency trading and are a forum for communication between traders. They are profitable from the current mania and need to find a better way to control it.

Charles Randall, chairman of the UK’s Financial Conduct Authority (FCA), acknowledged last week that even harsh warnings do not deter young people. He recently visited a school in east London to talk to a group of 13-14-year-old students about the risks of the crypto world.

They accept it “as gambling”, but still believe that they can make money from it. “The students were very capable, but the hope of getting rich was stronger than all the rational arguments I could give them,” Randall said.

“Against the backdrop of celebrities like Kim Kardashian and Larry David, who want to make money from advertising speculative cryptocurrencies, how can we cool people’s enthusiasm to do something that could significantly hurt their finances?”

Last year’s FCA survey found that 2.3 million Britons own some form of cryptocurrency, not far from the number of people who invest in stocks and shares. Although most cryptocurrency owners know that their investments are not safe, more than one in ten say otherwise.

Probably more on the subject should be done by schools. Here’s the question: how can someone guarantee someone that they will make money? If an influential person on TikTok tells his followers to buy a token, what will be the consequences for him in case they lose money? Correct answer – none.

There are other regulated activities that older students can legally try – they are also risky and financially harmful – including gambling, day trading, or gambling, but there are some protections.

The UK, for example, has banned gamblers from using credit card payments; betting sites should contain warnings about the large number of customers who are losing money; The FCA has limited the amount of leverage that inexperienced investors can use. Meanwhile, the crypto world remains free for all.

The first rule of gambling is to never bet more than what one can afford to lose. Crypto investors must also adhere to certain traditional investment “rules” such as diversification. Subaya’s experience can be compared to that of 34-year-old Dan, who listens to podcasts at Money Clinic. For example, he also holds cryptocurrencies, but their share in his portfolio is below 15%. However, he reports that the value of his cryptocurrencies has dropped by several thousand pounds since the last sale.

Against the backdrop of many claims by celebrities and influential people that trading can make many rich, talking about the reality of bankruptcy may be the most powerful educational tool for young investors who have decided to take risks in an attempt to make a profit.

TerraUSD’s failure will shake all markets

In recent days, US financial markets and regulators have focused on fighting the TerraUSD algorithmic stablecoin to return to its one-dollar price after falling below 70 cents on Monday. Investors should be excited about what is happening not because of its connection to the crypto world, but because of what it shows in terms of liquidity in all financial markets, writes Aaron Brown for Bloomberg.

If the crypto-economy is considered a foreign country, then the markets for the exchange of cryptocurrencies with traditional currencies are like the markets of foreign currency. Liquid foreign exchange markets can boost gross domestic product by facilitating international trade and investment inflows. But they can also cause problems.

Exchange rates are often determined by investor views and financial flows rather than the foundation of supply and demand. Exchange rate volatility and irregular investment flows can be devastating to economies. For this reason, most governments and central banks focus on managing the exchange rate and foreign trade.

Although the crypto-economy holds great promise at a fundamental level, efforts to establish liquid and stable financial transactions between traditional and cryptocurrencies are often unsuccessful. Some crypto supporters believe this is a positive, preferring to keep the crypto world isolated from the regulations and problems of the traditional financial system. However, other fans are eager to link traditional assets and cryptocurrencies.

If the price of TerraUSD continues to fall, it will say nothing about the fundamental value of cryptocurrencies, but it will hit hopes that they can be integrated into the traditional financial system. Maybe in the future, people who want cryptocurrencies will have to earn cryptocurrencies to buy them. Investors who want to profit from crypto companies will have to direct their profits back to crypto services.

More importantly, if TerraUSD fails, it will be a blow to the hopes of many traditional financial institutions that rely on liquidity to maintain stability. This includes central banks, exchange-traded funds (ETFs), mutual funds, clearinghouses, securities dealers, and more.

TerraUSD is an “algorithmic stablecoin”, which means that it tries to maintain a market price of one dollar through an algorithm and not through traditional methods, such as providing one dollar for each token. TerraUSD can be exchanged for another cryptocurrency worth one dollar – in this case, Luna. Therefore, if the price of TerraUSD deviates from one dollar, those responsible must reimburse it.

Although the Fed’s term is not officially tied to the price of the dollar, the central bank could use a similar strategy if it wants to influence it. If the dollar depreciates further in terms of purchasing power or exchange rates, the Fed’s two main responses would be to raise interest rates to make the dollar more attractive or to sell assets to shrink supply and shrink supply. raise the price. TerraUSD mainly used the second strategy, selling Luna, to reduce TerraUSD’s supply.

The strategy relies on the availability of a liquid market for the asset being sold – mainly government securities for the Fed and Luna for TerraUSD. Unfortunately for the Fed, if the price of the dollar falls, investors may not be enthusiastic about buying bonds that will be repaid in dollars in the future. TerraUSD has the same problem – the price of Luna is tied to the success of Terra’s product package, which would be disrupted by the collapse of TerraUSD.

ETFs have the same problems. Their price should reflect the value of their assets. If the price of an ETF deviates from the net asset value, arbitrage is expected to repay it by exchanging ETFs for their constituent assets or reserves. But if ETFs or their assets lose liquidity, the fund’s prices may deviate from the assets.

The mechanism used by TerraUSD is not fundamental in cryptocurrency. Many cryptocurrencies experiment with it, but all do so for exchange, not for the creation of fundamental services used by consumers outside the financial sector. The traditional financial system, on the other hand, is highly dependent on stabilization schemes that require liquidity and are not as well designed or automated as TerraUSD.

The failure of TerraUSD should cause more concern for dollar owners, ETF investors, and the traditional financial system than for the crypto world.

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