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The collapse of FTX, one of the world’s largest crypto exchanges, has rippled through the world of digital currencies.

Once valued at $32 billion, FTX filed for bankruptcy protection and founder Sam Bankman-Fried resigned as its CEO after reports alleged that the company had loaned billions of dollars in customer funds to his own trading firm, Alameda Research. This has fueled a flurry of withdrawal requests across platforms as investors braced for possible contagion.

With more than $2 trillion in cryptocurrency value wiped out since the 2021 high-water mark, cryptocurrencies are suffering from a spectacular fall from grace and are now drawing increasing regulatory scrutiny and investigations around the globe.

Michael Barr, the Federal Reserve’s vice chair for supervision, said recent events in crypto markets “have highlighted the risks to investors and consumers associated with new and novel asset classes and activities when not accompanied by strong guardrails.”

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This is in stark contrast to just a few months ago, when crypto enthusiasts were advocating for, and in some cases implementing, cryptocurrency’s inclusion in institutional portfolios and 401(k) plan accounts.

If any investors out there are still tempted to enter the cryptocurrency orbit at a potentially attractive, lower price point, consider this: The most profound risks to cryptocurrency investing may still lie ahead, rather than in the rear-view mirror. This is something we have highlighted in our conversations with clients for some time, but it bears repeating. Investors contemplating a long-term allocation to cryptocurrencies should remain wary for three primary reasons.

First, a lack of clear and uniform cryptocurrency regulation — both within and across countries — creates tremendous uncertainty for long-term investors. It is still unclear in the U.S., for example, when a cryptocurrency falls under the regulatory framework of a security subject to Securities and Exchange Commission regulations and when it is deemed to be an asset or commodity as proponents of bitcoin and ethereum have claimed.

Indeed, in some countries, cryptocurrencies are facing outright prohibition; China’s abrupt banning of all cryptocurrency trading and mining in 2021 is a prominent example, but by no means the only one. Regulators have also been concerned with the notable and repeated breakdowns in the infrastructure supporting cryptocurrency mining and trading — another area where there remains significant regulatory uncertainty. And the fallout from the FTX collapse makes one thing clear: Self-regulation and transparency are illusive.

Second, despite all the hype about their being digital gold, cryptocurrencies have failed to demonstrate either “safe haven” or inflation-fighting properties when faced with actual market volatility or the first real bout of serious inflation in developed markets.

Between 2010 and 2022, bitcoin recorded 29 episodes of drawdowns of 25% or more. By comparison, equities and commodities recorded just one each. Even in the pandemic-related market sell-off of March 2020, bitcoin suffered significantly deeper drawdowns than conventional asset classes such as equities or bonds.

Similarly, while the fixed supply of bitcoin — set forth in its source code — might imply a resistance to monetary debasement, in the recent episodes of elevated global inflation, bitcoin has provided limited inflation protection with prices tumbling even as inflation spikes in the U.S., U.K. and Europe.

Last, cryptocurrencies remain deeply problematic from an environmental, social and governance perspective. Most troubling are the governance issues that have been highlighted by the …….

Source: https://news.google.com/__i/rss/rd/articles/CBMiXWh0dHBzOi8vd3d3LmNuYmMuY29tLzIwMjIvMTEvMjUvY3J5cHRvY3VycmVuY3ktaGFzbnQtYmVlbi1hLXNtYXJ0LWludmVzdG1lbnQtZm9yLWEtd2hpbGUuaHRtbNIBYWh0dHBzOi8vd3d3LmNuYmMuY29tL2FtcC8yMDIyLzExLzI1L2NyeXB0b2N1cnJlbmN5LWhhc250LWJlZW4tYS1zbWFydC1pbnZlc3RtZW50LWZvci1hLXdoaWxlLmh0bWw?oc=5

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