Amid Exchange Collapses And Never-Ending Volatility, Crypto Risk Management Is More Vital Than Ever
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Institutional investors have become more cautious about investing in crypto amid a stark increase in the risks of dealing with digital currencies.
For instance, a recent report by Reuters points out that investors have become wary of doing business with many cryptocurrency exchanges, following the collapse of some of the industry’s most prestigious trading platforms. Last year saw FTX, once the world’s second-largest crypto exchange by trade volume, go bankrupt in a matter of days following a report on its lack of liquidity.
The report prompted a run on FTX, with customers scrambling to withdraw their funds from the platform. FTX didn’t have the funds available to support the huge number of withdrawals, and was ultimately forced to shut down its platform before filing for bankruptcy in the days that followed.
FTX was, however, just the most prominent of several top exchanges to fall, with others including Celsius Network and Voyager Digital also bringing their operations to a halt, leaving thousands of crypto investors unable to access funds held on their platforms.
Cautious investors have reportedly responded by switching to crypto exchanges that provide enhanced asset protection, as well as decentralized exchange platforms that don’t hold customer’s funds. DEX platforms saw a significant increase in trading volume in November, amid the wake of FTX’s collapse, because they enable customers to retain self-custody of their funds while trading, making them much safer venues for those with substantial assets.
Indeed, many crypto traders no longer trust even the biggest and most reputable centralized exchange platforms, such as Binance and Coinbase. Both of those platforms have recently been targeted by the U.S. Securities and Exchange Commission, which accuses them of breaching many of its rules, and investors believe it’s now too risky to entrust their funds with them.
Sudden Price Swings
The risks of trading crypto are further increased by the market’s notorious volatility, which can cause the price of established digital assets to swing wildly in a matter of hours. In 2022, the value of the entire digital asset market fell by almost $1.3 trillion as top tokens such as Bitcoin and Ethereum fell far from their all-time highs. The price of Bitcoin went from almost $70,000 in late 2021 to as low as $16,000 in early 2023, before rebounding to over $30,000 this summer. However, just a few days ago the price of BTC suddenly dropped to below $26,000 after U.S. Federal Reserve Chairman Jerome Powell said he is considering hiking interest rates further.
For years, crypto volatility management has focused mainly on strategies, with investors keeping the bulk of their digital funds in so-called cold storage – a physical wallet that’s disconnected from the internet to prevent hacking. To guard against volatility, investors also have the option to move into stablecoins such as Tether or USD Coin, which are pegged to the price of the U.S. dollar.
Investors Seek Reassurance
Some investors are looking for even greater security. Crypto insurance has been around for a number of years but until recently it has generally been difficult to find coverage for more obscure digital assets. It is an evolving sector, however, with services like FairSide now offering coverage for a wide range of crypto assets held in almost any kind of wallet type. For a flat fee of just 1.95% of the value of their assets, investors can protect their portfolios against various loss types and events, including wallet hacks.
Meanwhile, other services have emerged to help investors overcome the market volatility that can make or break their fortunes in a heartbeat. Libertify bills itself as a kind of “crypto seatbelt”, using AI algorithms to automatically adjust investors’ portfolios to hedge against risk, according to their level of risk tolerance.
Blockfence is growing its reputation in decentralized finance space. Investors can install a simple browser extension that provides an immediate alert if there’s any danger of being scammed, for example if they’re about to send funds to a known malicious actor’s address or interact with an unsafe smart contract, for instance.
The growth of these kinds of crypto risk management tools is a welcome development in the industry. They help to provide much-needed reassurance and prevent the withdrawal of institutional liquidity from the wider digital asset ecosystem. If the digital asset space is ever going to achieve mass adoption, it will need to evolve its risk management offerings beyond the handful of services it currently offers. By giving investors the same level of protection that they’re used to in traditional finance, the crypto industry will continue to boost its appeal.