"After all, you only find out who is swimming naked when the tide goes out," Warren Buffett, the Oracle of Omaha, wrote in his annual letter to Berkshire Hathaway shareholders in February 2002, and his words could not be more appropriate today.
The shock and market reaction to the terrorist attack on America on September 11, 2001, barely months prior, took $US1.4 trillion off the stockmarket. It was a major setback for the airline and insurance industries.
Today's steadily receding wave is propelled by something new: a broadscale reset once stimulus is exhausted. At the same time, the system is vulnerable to new threats like as conflict, supply chain disruption, and inflation uncertainty.
Bitcoin and cryptocurrencies, NFTs, the buy now, pay later sector, growth stocks with no line of sight to profit, and at least the outskirts of the mortgage market have all been affected or will be affected by this reset.
TerraUSD dives below $1 last week
TerraUSD is a stablecoin that was allegedly tied to the US dollar and is used to trade on cryptocurrency markets. TerraUSD collapsed because its foundation — the technology that underpins it and keeps it tied to the dollar to keep it stable – was insecure.
The peg was broken when a series of large withdrawals pushed the price down to US69c. Bitcoin has lost more than 50% of its value from its November high, and more than 20% in the last ten days. It's a bummer if you got bitcoin for Christmas.
Enthusiasts, including some very smart individuals, have contended that global central bank Covid-19 stimulation would erode cash's credibility as a store of wealth.
Money creation would obliterate cash's value. Bitcoin would replace cash as the new store of value, with a limit on the number of coins that may ever be created. It would also be more trustworthy than gold.
The systemic risk posed by the connected worlds of bitcoin and decentralised finance, or DeFi, is even more concerning. The people behind TerraUSD liquidated their bitcoin holdings to prop up the stablecoin, which contributed to the bitcoin drop.
Economically insignificant
Cryptocurrencies are not yet economically significant, but they have exposed the unwary punter to enormous danger and are unregulated.
Treasury Secretary Janet Yellen called for regulation at a US Senate banking committee hearing last Tuesday, saying that the TerraUSD's value collapse "simply illustrates that this is a rapidly growing product and that there are risks to financial stability... they present the same kind of risks that we have known for centuries in connection with bank runs."
The Wall Street Journal reported earlier this month that the NFT market was imploding. Non-fungible tokens, which range from Bored Apes to fine art, are essentially a digital certificate of ownership that resides on the blockchain.
According to the data website NonFungible, daily NFT sales have dropped from a peak of 225,000 in September to 23,000 last week. The buy-now, pay-later industry, which exploded during the epidemic stimulus, is likewise due for a reckoning. Last week, consumer groups and charities in Australia wrote an open letter to the new federal government, pleading with it to regulate the sector.
In Europe, cryptocurrency regulation has entered a new phase
The EU is set to implement a unique legal framework for cryptocurrencies and markets in the near future. The decision comes as digital assets plummet and some of the world's largest "stablecoins" face a crisis.
According to Olivier Van den Broeke, a senior associate in Baker McKenzie's Antwerp office, the new EU-wide regulation will assist the bitcoin industry gain legitimacy. "There will be more confidence from investors [and] financial markets in particular if it is better regulated and controlled." That will benefit all participants in the economy."
In addition, the new rule will create a new European "passport" that would allow non-EU cryptocurrency platforms and other service providers to apply for a license that will allow them to operate across all 27 member countries.
To manage crypto with a common approach, an international framework is essential, and an unregulated crypto world only encourages misunderstanding and potential exploitation of a genuinely exciting innovation.
Even more crucial is fully informing customers about the risks of investing in cryptocurrency and the importance of distinguishing between fraudulent and well-intentioned schemes.