Cryptocurrencies are digital currencies created to facilitate transactions over the internet. These currencies are not own or control by a central bank like the tradional currencies (naira,rand,CFA ,dollar,euro, and others). Bitcoin is the first cryptocurrency created in 2009 by Satoshi Nakamoto,thanks to the block chain technology which is the technology powering all cryptocurrencies and crypto assets today. It was easier to exchange Bitcoin on any site back then without creating multiple accounts. Today with over 1000+ cryptocurrencies listed on coinmarketcap among others, there is need to look at what this disruptive technology has for us.
Let us consider some factors worth looking into when it comes to bitcoin and cryptocurrencies
What are systemic risks of bitcoin/Cryptocurrencies if any and have regulators been sufficiently aware of any risks?
Risk Associated with Bitcoin/cryptocurrencies
- Who is the legal back-up of Bitcoin?
If someone steal your wallet with your bitcoins inside, who is the authority that is going to act for that consideration? Actually, none because bitcoin is free of authority which is a good thing and bad thing also. For example, when Mt Gox. went to bankruptcy, no one took care of thousand of people which bitcoin was stolen (according to them) and the japanese governement, even that took actions against Karpeles and the company, wasn’t enough to fulfill the situation.
- High volatility
Volatility means that an asset is risky to hold—on any given day, its value may go up or down substantially.
The volatility of bitcoin and cryptocuurencies still constitute a great challenge for risk management and is looked upon as a systematic risk too.
The price of Bitcoin is highly volatile. Typical 30-day volatility is around 40 percent and 90-day volatility is close to 70 percent. These swings in value are hard to stomach for many people. Although the cryptocurrency has an upward trend, it’s still risky.
Good currencies have low volatility, as owning unstable currency or accepting it as a form of payment becomes too risky.
3 . Security of services/products
In order to use Bitcoin you need wallets, exchanges, payment processors, etc. Not all of these services have perfect security and if your funds are stolen, all you can do is to hope your service provider will be kind enough to give you a refund.
Mt. Gox, where thousands of users were left without their funds after a big hacking attack, is the worst example of this.
Other cryptocurrencies could make Bitcoin a thing of the past. Offering faster transactions, complete anonymity, storage space and other improvements could lead to lower market share for Bitcoin. If we consider the high quality of emerging cryptocurrencies, this scenario seems pretty plausible. With this most of those who invested in bitcoin might end up losing a lot of money which can lead to the collapse of banks or other financial instistutions that are involve in trading bitcoin . This can affect the financial industry and can thus constsitute a systematic risk.
5. No safety mechanisms
Bitcoin has no safety mechanisms. Typically, you’ll get a private key or random words which protect your wallet. If you lose your key, your funds will be gone with it. There’s no support to contact, no way to change the password, and no way you could verify your identity to get your account back. When it’s gone – it’s gone, there’s nothing anyone can do.
6. Government regulations
If the government decides to declare owning Bitcoin illegal, you may find yourself in trouble. Currently, the government’s stance on cryptocurrencies is not clear and the danger is real as Bitcoin is not taxed in most countries. This is somewhat of a competition to government-issued currency. Other regulations could also make Bitcoin less attractive. With a negative regulation overall, billions of dollars will be lost which is not something positive for the financial sector.
In a recent survey conducted in London (Center for Macroeconomics) if there were any systematic risk associated with bitcoijn led to 73% disagreeing .However there are still some point worth mentioning when it comes to the systematic risk associated with cryptocurrencies. This was based on the market worth of crytocurrencies which was $600 bllion dollars at the moment of the survey. This figure constitute just . These figures is less than facebook’s current worth and does not really constitute a major systematic risk. However with future predication of bitcoin price as much as $1 million per bitcoin, it might constitute a threat to the financial sector and thus need to be looked upon carefully.
What About Regulation?
They had been a lot regulations going on since September 2017 with China placing on ban on initial coin offerings and cryptocurencies exchanges. USA, Germany, UK among other countries lately are implementing taxes on crypto traders which gives crypto currencies a real look as a legal asset.
Any Countries have the right to declare bitcoin legal or not based on the awareness on the risk/advantages associated with bitcoin,altcoins and the block chain technology as a whole.
In December 2017. warned bitcoin investors on the risk associated with bitcoin. This proves awareness of the systematic risk associated with Bitcoin and Cryptocurrencies.
Bitcoin ATMs are being installed in various countries like USA, Australia,Germany and African countries like Zimbabwe and Nigeria. This shows that there is equally an awareness on the risk as well as the strong side.
In the London Survey earlier mentioned, 61% agreed or strongly agreed that cryptocurrencies should be more strongly regulated, with most focusing on the need to crack down on their use in tax evasion. This shows that there is awareness of the systematic risk linked to bitcoin and cryptocurencies.
The situation in Africa is not the same as most government officials don’t show much interest in the block chain technology.However countries like Tunisia,Kenya,Nigeria and Zimabwe are making progress as the concept is being spread to Africa. Consequently regualtors in Africa will evolve since the western countries had taken many steps ahead.
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