Two decades ago, economist and futurist Hazel Henderson, in one of the chapters of the book “Development and Globalization”, used the term “global financial casino” to describe the globalization of financial markets; A casino that brought the problem of instability due to the lack of regulation for this globalized market, and the contagion of the financial crisis of 2007-2008 was an example of that. Therefore, the importance of the news related to the fall in the value of cryptocurrencies lies in the possibility of possible damages that affect people’s capital.
Cryptocurrencies were first developed in 2008 and became popular as a completely peer-to-peer version of electronic money. Their prevalence as a monetary counterpart means that they have monetary functions such as a transaction intermediary. Bitcoin was the first cryptocurrency, but today it is said that there are more than 1,600 cryptocurrencies, and one of their most important characteristics is that they are not produced (or, in monetary terms, issued) under the supervision of an official national or international official authority.
Their extraction is based on computer processes that are possible even individually, but the important thing is that most digital currencies have a limited and fixed number of coins, and therefore, they cannot be multiplied arbitrarily. Despite these and many other advantages, the cryptocurrency market also suffers from shortcomings, the most important of which is instability and lack of regulations.
In the regulatory literature, if in an exchange, one of the parties cheats by unrealizing the characteristics of the property being exchanged, the possibility of prosecuting the offending party is small; or the cost of prosecution is high; Or finding a reliable party requires searching and processing a lot of information, then it is said that in such a market, transaction costs are high and many mutually beneficial transactions do not happen. Therefore, breach of trust and confidence can make this market and its actors face serious challenges and losses.
In 2017, the value of Bitcoin grew up to 1000 times and then crashed. Nevertheless, in the following years, this market faced a good growth and it had such a trend in 2021, but one of the characteristics of markets like the stock market is that when price bubbles occur, as a result of the difference between the fundamental value of the asset and the nominal value (market value), gradually, this bubble subsides and the market moves forward based on fundamental values.
Although in both markets, events such as war, famine, etc. affect the prices, but in the long run, the price trend is close to the fundamental value. So, about the future of cryptocurrencies, the question remains, what is their fundamental value?
In the stock markets, things like options or choices, which are a right and option to buy or sell, their value is linked to an underlying asset, but in the cryptocurrency market, where the custodian of each cryptocurrency is not responsible for it, destabilizing factors are always at work and For example, the effect of Elon Musk’s tweets on the value of Bitcoin or other cryptocurrencies is a clear example of this problem.
Among other challenges and problems of the cryptocurrency market, we can point out the dominance of the pluralistic behavior in it, which happens due to insufficient information about the market and the nature of the traded asset. These behaviors lead to excitement and convulsions, whose underlying causes are the excitement of fomo or the fear of missing out.
Fomo occurs when people see a dramatic increase in the value of a cryptocurrency and want to buy it when the value increases, but are not aware of the volatile nature of the market’s constant ups and downs.
The way to manage such behavioral biases and help with their subsequent challenges is to train people to participate in such markets. Providing real and useful information about the nature of the cryptocurrency market and how to choose a strategy, instead of providing black or white information about these markets, is a public good that can be placed on the agenda of any macroeconomic management.
Security challenges, fraud and deception are also among the problems that can be seen in the cryptocurrency market (just like any other market) and considering the attractiveness and potential profitability, instead of blacking out, it is appropriate that education in the field of capital security and of course the proper infrastructure to maintain security in cyberspace should be on the agenda.
Of course, maintaining security should not mean suppressing active people or preventing their activities, but rather paying attention to the blockchain protocols behind each cryptocurrency and the possibility of a bug or technical error about the cryptocurrency and taking appropriate measures to eliminate the possibility of huge losses.