The European Union has been keen to regulate the crypto market more strictly and by extension, the European Central Bank has been critical of cryptocurrencies. Chairman Christine Lagarde first appeared on television, calling crypto worthless.
But do they know who the ‘enemy’ is? To explore this, the European Central Bank (ECB) recently published a report titled ‘Decrypting Financial Stability Risks in Crypto-Asset Markets’.
One thing that is certain, and you don’t need a report for that, interest in cryptocurrencies has increased dramatically since the start of Corona. Fortunately, this is also the conclusion of the ECB. They write that despite the recent decline, the crypto market overall is seven times larger than it was at the beginning of 2020.
Consumers play a major role
Their report included several consumer surveys in Belgium, Germany, Spain, France, Italy and the Netherlands.
These surveys found that around 10% of households may have cryptocurrency. Interestingly, the majority of owners reported owning less than $5,000, while only 6% claimed to own more than $30,000 in crypto.
But who actually invests in cryptocurrency? These are mainly young adult men and highly educated people. And this is an interesting statistic: if their financial literacy is at the highest or lowest level, there is a good chance that someone will hold cryptocurrency.
Institutional Investors Want (Indirect) Crypto
The report looks not only at the role of consumers, but also of institutional investors. They write that there was an increase in the correlation between cryptocurrency and stock prices during (and after) the market tensions of March 2020, as well as during the downturns in the markets in December 2021 and May 2022.
According to the report, this indicates that during volatile periods, the crypto market is more closely tied to traditional risk assets, a trend that could be due to the greater participation of institutional investors.
If we look at the last 15 days, it can be seen that Bitcoin has not managed to stay above EUR 30,000, the price of Bitcoin is currently 37% lower than it was at the beginning of 2022. In the same 15-day period, Shopify shares dropped 76%, Snap dropped 73%, Netflix dropped 70% and even Cloudflare dropped 62%. These are all stocks of big tech companies, so maybe a little bit of bitcoin in a portfolio isn’t such a bad idea. According to the ECB, there is definitely a demand for some bitcoin for their portfolios among institutional investors.
Fidelity Digital Assets also surveyed European institutional investors, with 56% being exposed to cryptocurrencies. This is an increase of 45% compared to 2020. According to the ECB, this may be because the government measures can be interpreted as approval of crypto assets. For example, from July 2021, German institutional investment funds are allowed to invest up to 20% of their holdings in cryptocurrencies.
More options to invest
This has been made possible in part by the increasing availability of crypto-based derivatives and securities on regulated exchanges, such as futures, exchange-traded notes, exchange-traded funds and OTC-traded trusts, which have grown in popularity in Europe in recent years. Huh. ,
Along with clearing facilities, these products have made crypto assets more accessible to investors as they can be traded on traditional exchanges. It also ensures that the investor does not have to worry about the safety and security of their crypto. Yet Europe is lagging behind the rest of the world, with only 20% of crypto funds located on our continent.
Cryptocurrency carries risk
According to the report, the interest of institutional investors in cryptocurrencies will only increase, but it will come with more risks. This is partly because European banks offer derivatives on crypto, without the crypto actually in storage. These derivative crypto products track the performance of various crypto quotes. The researchers say about this:
“Any crypto-based exposure of entities, particularly if the assets involved are unsecured, could put capital at risk, with a potential knock-on effect on investor confidence, lending and financial markets if the exposures are of sufficient magnitude. “
To curb these risks, and to protect investors from themselves (inhale), proposals for stricter regulation have been introduced. They still need approval.
One of the proposals included the Markets in Crypto-Assets Regulation (MiCA) to strengthen markets and control regulatory uncertainties. The MiCA proposal was already published in September 2020 and is yet to be approved. This means that it will not be implemented before 2024, as it is not expected to come into force until 18 months after it is implemented.