Investors burned by crypto must not learn all the wrong lessons | Mint – mint | Team Cansler

I have to admit that I was hoping for the crypto market to collapse and burn. Not because I’d never invested in it and was upset that so many people were getting rich from it (although there were moments). But because I don’t understand what value it has or what problem it solves.

So I’ve spent the last 12 years assuming – and hoping – that crypto would go away. And now, after last week’s FTX crypto exchange debacle, it could finally be here. Or at least it could become a smaller part of the financial market.

But now I’m worried. After a decade of attracting investors, creating new millionaires and billionaires, and instilling a passion for investing in a new tech-savvy generation, I fear the consequences of its crash and incineration. Investors run the risk of learning the wrong lessons about risk.

I would feel a little guilty digging against crypto if it turns out to be the case that is plunging the US economy into a bad recession. But it doesn’t appear that FTX’s bankruptcy, or even the crypto market as a whole, poses a systematic risk – by design, crypto is meant to be outside of our traditional financial markets. When there is a big failure in the regular bond market, it’s bad because it affects everything and the whole market collapses. That is not the case with crypto.

But there’s still cause for concern about what the FTX crisis means for investors in general.

First off, the entire crypto market is in trouble right now and people are losing money. That’s never good. Of particular concern is that many of the newest crypto investors, the ones who bought at high prices and watched them fall, tended to be higher net worth investors, some of whom were new to the financial markets altogether. Hopefully they didn’t invest more money than they could afford to lose.

The value of crypto should be that it offered a hedge against the US dollar or more conventional parts of the financial market. Or that it would retain its value when all else fell. But an asset that offers this kind of protection is rare; Most assets are correlated in some way, especially when their markets are falling.

Rarity usually means an expensive asset that offers a lower rate of return. You pay a high price for this type of security, and it’s usually hard to find. The fact that crypto offered such high returns suggested it was never a good hedge. Instead, it just added extra risk to your portfolio. The bottom line here is that anything that seems to deliver very high returns comes with the risk of losing your shirt at the worst possible time.

My second concern is the blow dealt to the credibility of the financial system. Instead of making the true nature of the risk clearer, the system has instead followed the idea that it’s possible to get something for free. If people want to speculate on risky assets that could crash and burn, they’re perfectly fine as long as they’ve never been misled or pose a major systemic risk. But it is a failure of any trustee that has allowed crypto assets in retirement plans. Offering this option shows that the trustee believes crypto is a prudent long-term investment for money that people will need in the distant future.

Earlier this year, the U.S. Department of Labor expressed concern about crypto in retirement plans and planned an investigation. But perhaps his concern was too little, too late. This leads to a loss of trust in the system, and that has consequences. Some investors may scale back their investments or shy away from investing at all, missing out on future returns on more sensible assets like index funds.

Instead, people shouldn’t take the lesson that markets are rigged, but rather that extremely risky assets probably don’t belong in retirement portfolios.

Crypto’s decline is happening at the same time other tech companies are seeing their valuation tank. They were probably due for a fix too, but that’s no coincidence. A rise in interest rates and inflation tends to deflate all types of risky assets. A bigger concern is when investors get too nervous and this spills over into other assets, bringing down the entire stock market.

So far there is no sign of this happening. The markets seem to be moving more from macroeconomic news than crypto. But rising interest rates harbor many risks. The crypto crash is a symptom and not a cause of a riskier environment, which should be a reminder that financial markets offer no guarantees. The ultimate lesson here is not that markets are bad or a rigged game. The point is that you should never speculate more than you can afford to lose in an asset class that has no clear intrinsic value.

Allison Schrager is a columnist for the Bloomberg Opinion on economics.

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