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"The bubble of a generation" - ECB highlights 3 dangers of cryptocurrencies

Cryptocurrency Dec 08, 2022 09:00
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Investing.com - In what is yet another testament to the ECB's aversion to cryptocurrencies, Fabio Panetta, a member of the European Central Bank's board of directors, gave a speech on Wednesday in which he methodically outlined the flaws and damaging effects on the economy of Bitcoin and other crypto-currencies.

Cryptocurrencies are "the bubble of a generation" that is "doomed to burst", and are just a "new way of gambling" he explained.

To support his opinion, he put forward three specific arguments: The uselessness of cryptos from a social point of view, the risk posed by the illusion of security of stablecoins, and the danger of the high leverage used by crypto traders.

Cryptos are useless from a social point of view and harmful from an environmental point of view

Panetta noted that "unbacked crypto-assets do not perform any socially or economically useful function," pointing out that "they are not used for retail or wholesale payments" because they are all "too volatile and inefficient."

Cryptos, on the other hand, are "widely used for criminal and terrorist activities, or to evade taxes," according to him.

Panetta also pointed out that cryptocurrencies "can cause huge amounts of environmental damage."

He feels that "crypto-assets deemed to have an excessive ecological footprint should also be banned," referring to cryptos such as bitcoin that use an energy-intensive "proof-of-work" network security mechanism.

The illusion of security in stablecoins

The second major flaw in cryptocurrencies noted by Panetta concerns "the purported stability of stablecoins, which the entire crypto ecosystem has relied on."

He explained that stablecoins "appeal to users because it is claimed that, unlike unbacked cryptos, they provide stability by having their value tied to a portfolio of assets," making the distinction with algorithmic stablecoins, which "aim to match supply and demand to maintain a stable value."

Referring to the TerraUSD stablecoin crash earlier this year, however, Panetta asserted that "stablecoins are stable in name only," pointing out that even the stablecoin leader Tether "temporarily lost its peg amid the ensuing market stress," which he said shows that "even for collateralized stablecoins, risks cannot be eliminated easily."

The risk of excessive leverage offered to crypto traders

Finally, the third structural weakness of cryptos noted by Panetta "is the fact that crypto markets may have incredibly high leverage and interconnections."

He pointed out that "crypto exchanges allow investors to increase exposures by up to 125 times the initial investment," explaining that "when shocks hit and deleveraging is needed, they are forced to shed assets, putting strong downward pressure on prices"

Panetta also lamented the mechanisms behind this leverage, with "pervasive over-collateralization adopted in DeFi lending to compensate for the risks posed by anonymous borrowers."

Indeed, he explained that "funds borrowed in one instance can be reused as collateral in subsequent transactions, allowing investors to build large exposures," pointing out that "these are precisely the dynamics we have seen at work in the recent crypto failures," referring here to the FTX bankruptcy.

Translated from French.

"The bubble of a generation" - ECB highlights 3 dangers of cryptocurrencies
 

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Comments (3)
Takacs Kundi
Takacs Kundi Dec 08, 2022 11:03
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I think he does not really understand crypto. These facts are spoken by people who are not familiar with DeFi. It’s becoming less volatile, more regulated (Binance crypto bailout plan). JP Morgan hired a new Director of Crypto regulatory policy.Google, Mastercard, Visa, and other big names are already into crypto. Crypto is not used only for terrosism and for shady business, it s sound like he knows nothing about crypto. Mastercard and Visa are launching programs to enable banks to offer crypto trading to their customers. Next fev years will be challeing for crypto, but its growing fast and improving their transparency and reliability. ECB is reacting with phase delays as always.
Chris Chadwick
Chris Chadwick Dec 08, 2022 10:32
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Why do we need propaganda if crypto will fail anyway?
Simon Franken
Simon Franken Dec 08, 2022 10:15
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this sounds all very logical. On top of the arguments, trust in a currency is key for its use and vakue. The desire to speculate is the key driver of investors in crypto currencies, not to store value because the financial is trustworth or to use exhange goods and services against it. As long as the current motives are the same, huge volatily will remain and the risk to lose a large part of your investment. Another aspect little talked about is the low market cap of all crypto currencies which makes it a ideal tool for price manipulation and profitering by large parties at the cost of retail investors.
Tobias Munk
Tobias Munk Dec 08, 2022 10:15
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The trust in fiat currency or the lack of it is behind the need for existance of crypto. Speculation is just noise and expansion of volatility. Does mot take away fundamental rihht for existance of crypto. Fully agree on the environmental assessment. Ether lead the way. Bitcoin will fail if they do not get away feom the energy intensity.
 
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