Market Collapse Prompts Warnings, Calls for Regulation, and Words of Encouragment

With stocks, crypto, and everything in between currently struggling to stay afloat, commentary has been pouring in from pundits in each sector.  Some to say ‘I told you so’ and others to provide encouragement for the years ahead.  The following are a few of these perspectives, coming from regulators and investors alike.

Business as Usual

Securities and Exchange Commission (SEC) Chair Gary Gensler, recently touched on market conditions, flashy returns, and highlighting a continued need for regulation of lending platforms – no doubt a focus since the market turmoil caused by Celsius Network began.

Overall, while the SEC remains ‘intrigued’ by Bitcoin in particular, it will not be changing its tactics anytime soon, standing firm in its belief that many (if not most) digital assets remain unregistered securities.  This commentary was timely, as it reaffirmed the SECs belief that it should remain the primary regulatory overseeing digital assets – something called in to question (albeit indirectly) in the recently released ‘Lummis-Gillibrand Responsible Financial Innovation Act’.

In addition to this, Gensler issued a fresh warning to investors that if something appeared to good to be true, it probably is.  Here, he was referring to over-the-top interest rates often touted by lending and DeFi platforms.

Regulation in the EU

The SEC is not the only regulatory body hoping to get a handle on digital assets.  In recent commentary from the European Commissions Commissioner Mairead McGuinness, it was suggested that regulatory framework needs implemented that would see all crypto-asset services providers become regulated entities under the supervision of the European Union.

Unsurprisingly, there were three events in particular which McGuinness believes underscored the need for such regulation.  These are,

• Circumvention of Financial Sanctions (Russia)
• TerraForm Labs (Algorithmic Stablecoins)
• Celsius Network (Frozen Assets)

McGuinness did not elaborate on how proposed framework would allow for financial sanctions imposed on Russia to be enforced, while remaining confident that it could be done. “In the context of Russia’s war against Ukraine, there were concerns that crypto could be used to circumvent our sanctions regime.  We made it very clear that our sanctions also applied to crypto.  Of course, sanctions implementation could be facilitated if our framework on crypto was in place, and if all crypto-asset service providers were regulated entities and subject to effective supervision in the European Union.”

The Forever Optimist

If after reading about pending regulation you find yourself hungry for a slice of optimism, look no further than MicroStrategy CEO Michael Saylor.  Forever a firm believer in the need for, and potential of Bitcoin, Saylor has indicated that despite being significantly under-water he has no intention on selling any BTC reserves.  Not only that, in an attempt to put investors at ease over the stability of MicroStrategy and its exposure to BTC through its treasury reserve, Saylor broke down at which price points the company would need to post new collateral to avoid defaulting on existing loans that were taken out to purchase the digital asset.

Furthermore, Saylor has taken to twitter to share what he believes is the path forward that will allow for digital assets to reach their potential – the Lightning Network.  He states, “The sound ethical, economic & technical foundation for DeFi is Bitcoin.  The next generation of DeFi will be built using the Lightning protocol and the BTC token.”

When discussing Bitcoin and whether or not he would continue to purchase the asset at current prices, Saylor explained that while many are currently viewing BTC as a ‘risk-on’ asset, he views it as ‘risk-off’, as no investor has ever lost money by holding BTC for a 4+ year time frame.  When asked if it was currently a great buying opportunity, Saylor didn’t mince words, stating, “Absolutely – Bitcoin is backed by the most powerful, secure, computer network in the world.  If I gave you $100 billion you couldn’t reproduce it.”  He continued, “This is an ideal entry point”.

Despite its CEO’s unwavering belief in Bitcoin, MicroStrategy stock (MSTR) has unsurprisingly taken a hefty hit – along with most of the stock market.  However, due to its exposure to Bitcoin, MSTR prices have dropped from a peak of $860 in Nov. 2021, to a 2-year low of $171 at time of writing.

Losses Only Occur When You Sell

Regardless of whether you intend to hold, trade, or exit the market completely during these turbulent times, many wonder when they see such market collapses where the money has all gone.  This is when its important to remember that you haven’t taken a loss until you sell.  It is not necessarily money that has disappeared from the market – rather, it is value, which is an important distinction that can seem counterintuitive.

Overall, entire asset values are shaped through only a minor amount of trades that set the bar for entire markets.  No one has taken money out of your portfolio – your assets are simply valued less.

This perspective was recently elaborated on by Stephen Brown, Canada economist with Capital Economics, in a discussion with CBC.  He states, “This is actually one of the issues I remember struggling with hardest when I first got interested in markets…When a stock tumbles and an investor loses money, the money doesn’t get redistributed to someone else…We value the entire market based on the marginal product that’s sold, and that is why you can have these extreme moves in the total value of the underlying instrument, even though that doesn’t intuitively make any sense.” 

This is an approach shared by many such as El Salvadoran Finance Minister Alejandro Zelaya who clarified recently that, “A supposed loss of 40 million dollars has not occurred because we have not sold the coins” when discussing criticisms over the country’s decision to adopt Bitcoin.