The Crypto Crash Was Caused by Fraudsters—and Regulators
A GREAT ARTICLE by CAITLIN LONG , CEO, CUSTODIA BANK
The crash that shaved more than $1 trillion of value from the digital-asset industry in the past few weeks was entirely foreseeable. I have been warning about the dangers of leveraging bitcoin and cryptocurrencies since 2018, as have others. Few heeded warnings as prices soared.
The asset bubble inflated when Wall Street traders crowded into crypto in 2018, and it quickly ballooned. The bitcoin market had never before seen the leveraged games that afflict traditional markets. Nowhere in Satoshi's brilliant Bitcoin white paper did the words "margin call" appear. It didn't take long for crypto derivatives trading volume to explode.
Regulators—especially the Securities and Exchange Commission—bear some blame. They've been slow to crack down on fraudsters and to approve responsible players. There was only one SEC-approved way for investors to gain exposure to bitcoin via their brokerage accounts from 2015-2021: closed-end fund Grayscale Bitcoin Trust (GBTC).
Demand far outstripped supply, pushing prices into the stratosphere. As a result, for years GBTC's price consistently traded far above bitcoin's market price—more than double bitcoin's price at its peak. Leverage poured in because fund shares could be created at bitcoin's price and sold to retail investors at the higher GBTC price—a trade viewed as a "sure thing" by Wall Street. That ended last year when the SEC, for the first time in six years, finally began approving competing products. Sure enough, once competition came that huge premium collapsed. GBTC now trades at a more than 30 percent discount to bitcoin's price. Hence, leveraged players suffered big losses.
The fast-money crowd caused bitcoin to trade more like a highly volatile tech stock than an insurance policy against financial system instability. Remember, the Bitcoin blockchain itself is immune to all of this noise. Its value proposition remains unchanged. It just keeps adding blocks every 10 minutes.
Markets are teaching a valuable lesson. Policymakers should use the time afforded by the crash both to prosecute fraudsters and to implement a regulatory regime that fuels responsible innovation.
https://www.newsweek.com/crypto-crash-was-caused-fraudsters-regulators-opinion-1720299