What Can We Learn From Recessions Past?

Look, the economy has been weird for a while now. I can’t pretend to know exactly what’s going on or, more important, what will happen in the future, but I do know it’s unsettling to leave the grocery store wondering how the hell you just spent $40 on mediocre salad ingredients and some chicken. These are mysterious and confusing times, and I don’t have all the answers.

Based on history, things will probably get worse before they stabilize. The Fed is trying to fight inflation by raising interest rates — part of its job — which has had the unfortunate side effect of triggering recessions in the past. Of course, there are other ominous forces at play, too, like supply-chain problems and COVID and the war in Ukraine. No one can predict a recession for sure, but the odds are pretty high.

That’s scary to think about, especially considering that the last big recession (i.e., the Great one) cost millions of people their jobs and their homes. But the lessons from previous recessions can make the next one a little easier to handle, whenever it hits. (And not just “save more money,” although that undeniably helps those who can afford to do it.) I spoke to several financial experts about putting this moment in context, what to remind yourself of when things look hairy, and the mistakes to avoid.

Resist the urge to take drastic action.

When things feel precarious or a recession actually happens, it’s natural to want to do something — liquidate your 401(k), hoard beans, buy random stocks you read about online. Things are urgently bad, and you can’t just sit there! But actually, you probably should: “People tend to want to make big moves when they’re anxious, but it’s almost always better not to,” says Megan McCoy, a financial counselor and professor of financial planning at Kansas State University.

“No one makes great choices when they’re panicking, and economic scarcity is known for triggering irrational actions that don’t serve you best in the long run.” One example of this is the rush to buy homes, which started during the earliest days of the pandemic (technically, the last recession). “I spend a lot of time telling my clients, ‘No, don’t buy a house. Don’t buy an apartment. Stay put if you can — real estate is crazy right now,’” says Georgia Lee Hussey, a certified financial advisor and founder of Modernist Financial.

“They’re trying to anchor themselves to deal with their anxiety, which is completely understandable, but that doesn’t mean you should act on it.” A better way to channel that stress is to take stock of your spending. “The only thing you can really control right now is your cash flow from day to day,” she adds. “If you’re feeling pressured to act, get one of those tracking apps and gamify it for yourself. Knowing where all your money is going and seeing where you can save are good uses of that impulse.”

You may have to improvise.

I’ve written before about how to prepare for a recession, and it certainly helps to have an emergency fund to fall back on. But the truth is that most people don’t. If that’s you, now isn’t the time to beat yourself up about it.

“If job loss does occur, be ready to make adjustments and remember that they are temporary,” says Dr. Preston Cherry, a certified financial planner and head of the financial-planning program at the University of Wisconsin. “You can take an alternative job you may not be thrilled about or sell some belongings. You’re just filling the gap and managing the moment.”

I don’t want to minimize how difficult those things can be. During the Great Recession, I lost my job and, after doing some depressing temp work, eventually found a new position that wasn’t a great fit (I stayed for over a year because health insurance!). I don’t want to do that again, but there’s some comfort in knowing I could if I had to.

Beware the get-rich-quick schemes.

When people are nervous and desperate, they turn to the internet — where bizarre scams proliferate. “Especially at the beginning of the pandemic, when emotions were running high, I saw a lot of things online that were too good to be true,” says Dr. Cherry. “Some are more legitimate than others, but the important thing is that there’s no magic wand for making money.”

Some obvious examples: random cryptocurrencies and meme stocks, which, well, you know how that went. A similar thing happened in 2008, especially with scammers posing as government officers requesting financial information as a precondition for receiving tax refunds — and then opening credit cards in their names.

Even if you come across an “investment opportunity” that sounds aboveboard (and may be, technically), it’s usually not good to experiment with your money during a volatile time. You’re better off putting any funds you’ll need in the near future somewhere boring and safe where you can access them, Dr. Cherry adds.

Don’t be afraid to seize the moment.

No one wants to profit off widespread misfortune and economic suffering. But if you’re one of the lucky ones who can afford it, investing your long-term savings (read: not your emergency fund) in the market during a downturn can be extremely smart. “Putting money into mutual funds when the market is down — that’s the dream,” says McCoy. “It’s not sexy to buy stocks now, but during every recession, some people have made a ton of money by thinking big picture.”

Remember that the economy will recover.

When the economy takes a dive, it can seem as if our entire financial system is crumbling and we’ll be burning our worthless dollar bills to cook our food. And hey, maybe that will happen someday — but in the near future, it’s much more likely that things will bounce back.

That’s because recessions are, unfortunately, a normal part of how our economy functions. They have occurred about once or twice a decade for the past 70 years. And there’s no reason to think the next downturn will be an exceptionally painful one — like, say, 2008’s, which was the worst in almost a century.

“It’s easy to anchor our minds to the Great Recession and worry that things will get that bad again, but the economy is very different now, and there are a lot of promising signals,” says Dr. Cherry. “Not all recessions are created equal.”

This may not be a ton of comfort if you’re stressed about losing your job and taking care of yourself and your loved ones. But it is important to keep an eye on the bigger picture, which is that these downturns do pass.

Source: Lessons From Past Recessions

Critics:

Policymakers should take the lesson from the past two years that vigorous fiscal and monetary policy can boost income for most households and disproportionately for lower-income households and can speed economic recoveries. However, doing too much can have serious downsides that might be difficult to mitigate.

Macroeconomic support for an economy deep in recession with many underused resources can increase output and employment with little effect on inflation. But as the economy gets closer to its capacity, additional macroeconomic support will feed increasingly into inflation instead of improvements in output and employment. Going forward, the magnitude and timing of the response should be improved through more automatic stabilizers, and the targeting of the response should be as well. The good news is such responses can be implemented efficiently if policies are developed in advance of a crisis.

It is important to draw lessons not just from what happened, but also from what did not happen during the COVID-19 recession: for example, there was no financial crisis in the United States or worldwide. The initial, robust response by monetary policy-makers was critical to keeping the financial sector on an even keel. Better preparation in the form of more robust and stress-tested balance sheets for banks prior to the recession also helped.

The preexisting social safety net is inadequate in the face of recessions: it is not generous enough and has too many gaps, which is why it needed to be supplemented by policy action both in the Great Recession and to a much greater degree in the COVID-19 recession. Additional automatic stabilizers are likely part of the answer but are unlikely to be sufficient to avoid the need for well-timed and wise discretionary fiscal responses in the future.

It is still not clear what policies would work better in the United States to lessen the impact of a GDP decline on employment and preserve worker attachment to their employers. Job retention schemes were heavily utilized in European countries compared to state-based work sharing programs in the U.S.—these programs should be explored in greater detail for future downturns.

Related contents:

Economy Is at Risk of Recession by a Force Hiding in Plain Sight The New York Times

12:25
12:21
U.S. Retail Sales up 1% in June, easing fears of a recession Newsy

21:30 Fri, 15 JulUS Economy Business (US) Economy
20:34 Fri, 15 JulNasdaq US Economy Business (US)

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Crypto Winter Watch: All The Big Layoffs, Record Withdrawals And Bankruptcies Sparked By The $2 Trillion Crash

Fears of global recession and the worst inflation in more than 40 years have wreaked havoc on the nascent cryptocurrency market this year—unleashing a fierce crypto winter that’s forced once high-flying firms into bankruptcy and pushed investors into panic-selling mode. The turmoil has already claimed trillions of dollars in market value, billions of dollars in frozen funds and thousands of jobs, but current casualties may only mark the beginning of the storm.

“There will be others that come forward with trouble—I don’t think it ends here,” Marcus Sotiriou, an analyst at London digital asset brokerage GlobalBlock, tells Forbes, noting that close to a dozen firms—including Peter Thiel-backed Vauld—face an uncertain fate after locking customers out of their funds or initiating restructuring proceedings over the past month. “It’s going to be a sustained period of pain,” he says.

It’s anyone’s guess whether the current crypto bear market will ultimately rival the years-long crypto winters of 2014 and 2018—the latter wiping 80% from bitcoin’s price while crushing hundreds of then buzzy new tokens. Sotiriou posits this downturn could last up to 12 months unless persistent inflation soon cools down, allowing the Federal Reserve to ease up on aggressive interest rate hikes that make risky assets less attractive to investors. Analysts aren’t so sure that will happen.

“This is necessary for any financial market to mature and evolve,” argues Matteo Dante Perruccio, a partner at crypto investment firm Wave Financial who envisions that cryptocurrency prices will take at least six months—and up to two years—before recovering, similar to cycles past. “But this time, there’s a difference,” he adds, pointing to a wave of institutional money—from the likes of Tesla, Goldman Sachs, Morgan Stanley and more—that fueled widespread adoption during the pandemic:

“When we inevitably come back into an appreciating market, it’s going to be more sustained and healthier, with less speculation and more tried and true investment philosophy.”As crypto investors wait for brighter days ahead, Forbes is tracking all the carnage from the latest crypto winter, including layoffs, price plunges and record selling—as well as the lifelines and acquisitions that may help cushion the blow. Here’s the damage, so far:

Trillions In Value Erased

Low interest rates and government stimulus measures fueled skyrocketing cryptocurrency prices during the pandemic, but the Federal Reserve’s decision to curb rising inflation by hiking interest rates has since battered investor sentiment—ushering in some of the crypto market’s biggest losses in history. After amassing a record value above $3 trillion in November 2021, the cryptocurrency market posted its worst first half ever and has plummeted to about $950 billion, a nearly 60% drop this year, according to CoinGecko.

Piling on to bearish sentiment, Terra’s luna token, a once top cryptocurrency worth more than $40 billion, lost virtually all its value within a week in May after sister token TerraUSD, a stablecoin meant to hold a price of $1, broke its dollar peg as markets collapsed. Meanwhile, top cryptocurrencies bitcoin, ether and BNB have plunged 70%, 75% and 65% from record highs, respectively. It’s taken the market years to recover from similar declines: When growing regulation sparked a fierce crypto winter beginning in 2017, it took more than 1,000 days for the world’s largest cryptocurrency to nab a new high.

Thousands Laid Off

Faced with steep market declines, cryptocurrency companies have laid off more than 2,000 workers in less than five weeks. By far the biggest blow, popular brokerage Coinbase laid off 1,180 employees, or about 18% of its workforce, on June 14—weeks after the firm’s billionaire CEO, Brian Armstrong, warned investors that a potential recession could lead to a prolonged bear market for cryptocurrencies. In a note announcing the layoffs, Armstrong said he was planning “for the worst” and acknowledged the firm “grew too quickly” during the pandemic bull market.

“It was surprising, and it was hard,” one former employee posted on LinkedIn. Others described the cuts as “abrupt” and “sudden.” Also in June, Gemini, the exchange founded by the billionaire Winklevii twins, said it would cut about 10% of its 1,000 employees, and exchanges Crypto.com and BlockFi said they would terminate 5% and 20% of their workforces, affecting some 260 and 170 employees, respectively. Since then, lending platform Celsius reportedly laid off 150 workers, and Austrian trading platform Bitpanda cut 270 jobs, calling the move “necessary . . . to navigate the storm and get out of it financially healthy.”

Record Selling

Investors piled out of cryptocurrency investment funds at a record pace as bitcoin plunged to an 18-month low last month. Outflows totaled $423 million in the week of June 17, virtually erasing all inflows this year and eclipsing the prior record of $198 million from January, according to crypto asset management firm CoinShares. The turbulence pushed the assets under management of crypto investment products to a record-low $21.6 billion last month, down 37% from May, as “looming liquidation threats” fueled “panic” among investors after Luna’s crash, CryptoCompare analysts wrote in a report.

Meanwhile, Bank of America reports the number of its customers using cryptocurrency tumbled more than 50% to fewer than 500,000 since the market’s highs in November. Even bullish crypto firms have had to reckon with the changing market. On Tuesday, top miner Core Scientific revealed it sold a majority of its bitcoin pile at an average cost of $23,000 last month, raising more than $167 million. In a statement, CEO Mike Levitt attributed the sales to “tremendous stress” driven by weak markets, higher interest rates and “historic inflation.”

Canada-based Bitfarms, which made headlines in January by joining Tesla and former billionaire Michael Saylor’s MicroStrategy in buying bitcoin for its balance sheet, also offloaded a large sum, dumping 3,000 bitcoins, or nearly half its pile, for $62 milion late last month. “It’s typical behavior for bitcoin miners to sell during the final stages of a bear market,” explains Sotiriou, noting some firms may need to shore up funds to cover expenses or stay solvent as high inflation tacks on to operating costs.

Billions In Frozen Cash

Citing “extreme market conditions,” crypto lender Celsius became the first major platform to pause withdrawals and transfers between customer accounts on June 13. Within days, others followed suit: Babel Finance, CoinFLEX and Voyager all froze withdrawals. None have re-enabled access, thus making billions of dollars in funds inaccessible to their investors.

“They’re in a really sticky situation because they’ve been irresponsible with clients’ funds, somehow lost out and are now unable to pay back their clients—and there’s no guarantee they’ll pay the money back,” explains Sotiriou. In its most recent quarterly filing, publicly traded Coinbase warned of the risk, disclosing customers would be treated as “unsecured creditors,” or lenders without collateral to fall back on, in the event the company goes bankrupt.

Bankruptcies And Liquidations

A handful of crypto firms are simply collapsing. On June 27, Voyager issued a notice of default to beleaguered Singapore-based crypto hedge fund Three Arrows Capital (3AC) for failing to make payments on $675 million in bitcoin and stablecoin loans. 3AC at one point managed some $3 billion, but Singapore financial regulators condemned the firm late last month, saying it provided false information and only had the authority to manage up to $250 million.

On top of that, 3AC’s troubles were exacerbated by the sell-off’s impact on its risky investments, which reportedly included overleveraged bets on the Grayscale Bitcoin Trust and about $200 million in now-worthless Luna. On Friday, a British Virgin Islands court reportedly ordered 3AC to liquidate its assets, deeming the firm insolvent; it filed for bankruptcy the same day.

With 3AC’s fate sealed, Voyager itself filed for bankruptcy on Wednesday—a mere five days after it suspended trading. “While I strongly believe in this future, the prolonged volatility and contagion in the crypto markets require us to take deliberate and decisive action now,” Voyager CEO Stephen Ehrlich said in a statement. In a court filing, the firm disclosed that it had more than 100,000 creditors and up to $10 billion in assets. Vauld and Celsius have also announced they’re exploring restructuring options.

Lifelines And War Chests

Some crypto companies are hoping to be rescued before being forced to shut their doors by turning to more stable counterparts. On Friday, FTX, the exchange founded by billionaire Sam Bankman-Fried, entered into an agreement to buy embattled BlockFi for as much as $240 million. “You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers,” he told Forbes last month after providing BlockFi and Voyager with $750 million in credit lines between FTX and his quantitative trading firm Alameda.

More recently, he has said FTX has a “few billion” more to help struggling companies. Meanwhile, Goldman Sachs is reportedly looking to raise $2 billion to help buy up distressed assets from Celsius, and other legacy institutions are also showing interest. “I have this knee-jerk reaction that if you believe that the fundamentals of a long-term case are really strong, when everybody else is dipping, that’s the time to double down,”

Fidelity CEO Abby Johnson, who this year shepherded the firm’s industry-first decision to allow bitcoin in 401(k) plans, said last month when asked about what could be her third crypto winter. “That’s usually the right move.” “It’s incredibly encouraging,” says Dante Perrucio. “Big institutions looking for distressed crypto assets means they believe that the industry is going to come back—and come back strong—despite this very complicated period we’re all in.”

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism …

Source: Crypto Winter Watch: All The Big Layoffs, Record Withdrawals And Bankruptcies Sparked By The $2 Trillion Crash

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Binance Serviced Iranian Crypto Traders Despite Sanctions: Report Crypto Briefing

20:40
18:44

How Digital Currencies Went From Boom To Collapse

Yuri Popovich had watched his neighbours’ houses burn down to the ground in Kyiv and he needed a safe place to put his money. So he did what millions of amateur investors have done in recent years: he turned to cryptocurrency. “It was impossible and unsafe to store funds in the form of banknotes. There was a big risk of theft, we also had cases of looting. Therefore, I trusted a ‘stable and reliable’ cryptocurrency. Not for the purpose of speculating, but simply to save,” he says.

The digital asset that Popovich chose in April was terra, a “stablecoin” whose value was supposed to be pegged to the dollar. It collapsed in May, sparking a rout in the cryptocurrency market whose victims include Popovich. He lost $10,000 (£8,200). Popovich says his losses were “devastating”, although donations from sympathetic onlookers on social media have helped make up some of the shortfall. He says: “I stopped sleeping normally, lost 4kg, I often have headaches and anxiety.”

Popovich is one of many experiencing the deep chill of the current crypto winter, more than four years after the market’s cornerstone, bitcoin, marked the first digital freeze by tumbling from its then peak. It went on a long tear after that but it has come to a juddering halt, with bitcoin falling below the $20,000 mark at one point this month – far below its peak of nearly $69,000, which it hit last November.

The fall has been sharp and spectacular: an overall market that was estimated to be worth more than $3tn barely six months ago is now worth less than $1tn.

Crypto boom: a new digital economy

The beginnings of the latest crypto boom held all the hallmarks of being another instance of the “Robinhood economy”, named after the popular American stock trading app. Bored white collar workers, stuck at home because of pandemic lockdowns but awash with disposable income, turned to day trading as a way to pass the time. Subscribers to the r/WallStreetBets forum on the popular online discussion site Reddit doubled over the course of 2020 and then quadrupled in the first month of 2021, as a small army of retail investors flooded into assets as varied as the then bankrupt car rental company Hertz, the troubled video game retailer GameStop and the electric car manufacturer Tesla, pushing the latter from $85 at the beginning of the pandemic to a high of $1,243 towards the end of 2021.

Cryptocurrencies also benefited from the surge in day trading. Bitcoin soared from a low of $5,000 in March 2020 to more than $60,000 a year later. The currency has had that sort of precipitous increase before: in 2017, it had risen 20-fold, to its then peak of $19,000. But in the latest boom, ethereum, the number two cryptocurrency, had an even more impressive climb, from just $120 to a high of almost $5,000 in 2021.

Cryptocurrency is the name for any digital asset that works like bitcoin, the original cryptocurrency, which was invented in 2009. There is a “decentralised ledger”, which records who owns what, built into a “blockchain”, which secures the whole network by ensuring transactions are irreversible once made. In the years since then, a dizzying amount of variations have arisen, but the core – the blockchain concept – is remarkably stable, in part because of the social implications of truly decentralised networks being immune to government oversight or regulation.

Where, 10 years ago, people simply spoke of trading in bitcoin, the space has ballooned. As well as cryptocurrencies themselves, , the sector has developed in a complex ecosystem. It encompasses Web3, a broader selection of apps and services built on top of cryptocurrencies, DeFi, an attempt to bootstrap an entire financial sector out of code rather than contracts, and non-fungible tokens (NFTs), which use the same technology as cryptocurrencies to trade in objects rather than money.

The flood of money washing into the world of crypto did more than simply inflate the paper wealth of pre-existing shareholders. Instead, it led to a surge of interest in, and funding for, the vast array of projects that aimed to capitalise on the underlying technology of cryptocurrencies. For a generation of new investors, the “decentralised finance” opportunities of the sector were appealing. Built on top of the “programmable money” of the ethereum cryptocurrency, the “DeFi” [decentralised finance] sector is an attempt to expand bitcoin’s anti-establishment ethos to cover the entire economy.

Take the comparatively small sector of the crypto market known as NFTs. A product dating back to 2014, NFTs take the tech used to create cryptocurrencies, but let creators link unique assets to the blockchain, instead of money-like currencies. That means NFTs can be traded that represent works of art, virtual collectibles, or even function as tickets to events or membership of clubs. And like cryptocurrencies, they can be bought or sold in open exchanges, held pseudonymously, and packaged up or securitised in complex financial instruments.

One token, representing years of work by the digital artist Beeple, sold for $69m; another, linked to the first tweet sent by the Twitter founder Jack Dorsey, was bought for $2.9m. Individual NFTs in the Bored Ape Yacht Club collection – the most consistently desired examples of “profile pic” NFTs, designed to be used as pre-packaged online identity – regularly sold for $1m-$3m apiece. But by the beginning of 2022, the NFT bubble appeared to have already popped. “Floor” prices for large NFT collections had plummeted, and, while many large NFT acquisitions have stayed in private collection, those that have been put back on the market have fared poorly: the Dorsey tweet was withdrawn from sale after achieving a top bid of just $14,000.

And then: the crash

The crypto crisis has played out against the backdrop of wider market problems, as fears over the Ukraine conflict, rising inflation and higher borrowing costs stalk investors. Some market watchers play down the prospect of a crypto crash triggering serious problems elsewhere in the financial markets or the global economy. The total value of all cryptocurrencies is about $1tn currently (with bitcoin accounting for about 40% of the total), which compares with approximately $100tn for the world’s stock markets.

Since November the value of all cryptocurrencies has fallen from $3tn, meaning that $2tn worth of wealth has been wiped out, with no serious knock-on effects to the broader stock market – so far. Teunis Brosens, the head economist for digital finance at the Dutch bank ING, says the traditional financial system is relatively well shielded because established banks – the cornerstones of the financial world that buckled in 2008 – are not exposed to cryptocurrencies because they do not hold digital assets on their balance sheets, unlike during the financial crisis when they held toxic debt products related to the housing market.

“What has happened in the crypto market has caused great losses for some investors and it’s all very painful and not something I want to downplay,” he says. “But it would be overplaying the role that crypto currently has in the economic and financial system if you were to think there could be systemic consequences for the wider financial system or even a global recession directly caused by crypto assets.” To date, the turmoil has been limited to the crypto sector. Digital assets have been hit by some of the same economic issues that have affected the wider global economy and stock markets. Bitcoin and other cryptocurrencies have been affected by concerns over rising inflation and the ensuing increases in interest rates by central banks, which has made risky assets less attractive to investors. This meant that as stock markets declined, so too did crypto assets.

But the collapse last month of terra also hit confidence in cryptocurrencies. In June, a cryptocurrency lender, Celsius, was forced to stop customer withdrawals. And a hedge fund that made big bets on the crypto markets slid towards liquidation. Crypto investors and firms that had made bets on the crypto market using digital assets as collateral were forced into a selling spree. Kim Grauer, the head of research at the cryptocurrency data firm Chainalysis, says: “It was a combination of the stock market plus the kind of excessive reaction that is typical of crypto markets because of these cascading liquidations. In this case the key event was terra.”

She added: “Crypto is not going away. And it has experienced crashes more severe than this crash.” Regulators and various government agencies are looking closely. Harry Eddis, the global co-head of fintech at Linklaters, a London-based law firm, says recent events in the crypto asset market will strengthen regulators’ determination to rein in the industry.“nI think it will certainly stiffen the sinews of the regulators in saying that they’re more than justified in regulating the industry, because of the obvious risks with a lot of the crypto assets out there,” he says.

In the UK, the financial watchdog continues to expand safeguards on crypto products. Its latest proposals on marketing crypto products to consumers could lead to significant restrictions on crypto exchanges operating in the UK. Consumers reported 4,300 potential crypto scams to the Financial Conduct Authority’s website over a six-month period last year, far ahead of the second place category, pension transfers, which had 1,600 reports. The FCA has 50 live investigations, including criminal inquiries, into companies in the sector.

The terra collapse has also heightened regulatory concerns about stablecoins, because they are backed by traditional assets and therefore could pose a risk to the wider financial system. In the UK, the Treasury wants a regime in place for dealing with a stablecoin collapse, saying in May that a terra-like failure could endanger the “continuity of services critical to the operation of the economy and access of individuals to their funds or assets”.

“Even just the top three stablecoins hold reserves totalling $140bn in traditional assets, much of this being in commercial paper and US treasuries. A run on redemptions of the largest coin (tether) could destabilise the entire crypto asset system and spill over into other markets,” says Carol Alexander, the professor of finance at University of Sussex Business School.

Elsewhere, the EU is drawing up a regulatory framework for crypto assets with the aim of introducing it by 2024, while in the US Joe Biden has signed an executive order directing the federal government to coordinate a regulatory plan for cryptocurrencies including ensuring “sufficient oversight and safeguard against any systemic financial risks posed by digital assets”. The Federal Trade Commission, the US consumer watchdog, says 46,000 people have lost more than $1bn to crypto scams since the start of 2021.

In general, regulators have been talking tough about cryptocurrencies. The chair of the FCA has called for “strong safeguards” to be put in place for the crypto market, while the head of the US financial regulator has warned consumers about crypto products promising returns that are “too good to be true”, while Singapore has said it will be “brutal and unrelentingly hard” on misbehaviour in the crypto market.

‘I’m sure crypto will bubble again

Where crypto goes from here is an unanswerable question. For proponents, such as Changpeng Zhao, the multibillionaire owner of the Binance cryptocurrency exchange, the sector is sure to recover – though it might take some time. “I think given this price drop … it will probably take a while to get back,” he told the Guardian last week. “It probably will take a few months or a couple of years.”

For sceptics, however, the plummet could be a lasting wound. “Bitcoin will be around for decades,” says David Gerard, author of Attack of the 50-Foot Blockchain. “All you need is the software, the blockchain and two or more enthusiasts. Unless there’s new stringent regulation, I’m sure crypto will bubble again. But if there’s a genuine consumer bubble, it may not reach the heights of this one. The 2021-22 bubble made it to the Super Bowl. As many a dotcom found out 20 years ago, there’s nowhere to go from there – you’ve reached every consumer in America.”

But one thing both sides agree on is that the dividing line between “survivable downturn” and “cryptoapocalypse” is likely to involve neither bitcoin nor ethereum, but the third biggest cryptocurrency: a stablecoin called tether. Stablecoins are a foundational part of the crypto ecosystem. Their value is fixed to that of a conventional currency, allowing users to cash out of risky positions without going through the rigamarole of a bank transfer, and enabling crypto-native banks and DeFi establishments to work without taking on a currency risk.

In essence, stablecoins function like the banks of the crypto economy, allowing people to park their money safely in the knowledge that it is not exposed to wider risk. Which means that when a stablecoin collapses, it has a very similar effect to a bank failure: money disappears across the ecosystem, liquidity dries up, and other institutions begin to fail in a domino effect. The beginning of the latest crisis in crypto was sparked by exactly that: the failure of the terra/luna stablecoin. The algorithmic checks and balances put in place to keep it stable broke – triggering a death spiral.

And so on 9 May, a stablecoin called UST “depegged”, dropping from $1 to $0.75 in a day, and then falling further, and further and further. Within four days, the luna blockchain was turned off entirely, the project declared dead. A domino effect took out other crypto establishments. Some of the “contagion” has been prevented, in part through huge loans made by Alameda Ventures, the investment arm of 30-year-old crypto billionaire Sam Bankman-Fried’s empire. Drawing comparisons to JP Morgan in the panic of 1907, “SBF” has stepped in to support the crypto bank Voyager and the embattled exchange BlockFi, and been loudly calling for support from others.

Unlike terra, tether is a “centralised” stablecoin, maintaining its value through reserves which, the company says, are always redeemable one-to-one for a tether token. The model means it cannot enter a “death spiral” like terra, but also means the stability of the token is entirely a function of how much one trusts tether to actually maintain its reserves. That trust is not a sure thing. Tether once claimed to hold all its reserves in “US dollars”, a claim that the New York attorney general’s office concluded in 2021 was “a lie”.

Tether, and Bitfinex – a bitcoin exchange that shares an executive team with, but is legally distinct from, Tether – “recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines”, Letitia James, the New York attorney general, said at the time. The two companies had transferred money back and forth to cover up insolvency, she said, and had failed to ensure tether was “fully backed at all times”, the investigation concluded.“Te ther has been the timebomb under the market since 2017,” says Gerard.

“It has reduced its market cap by 15bn USDT in the last month, and has claimed that these are redemptions, or a reduction in their holdings of ‘commercial paper’,” she says, referring to one of the key assets that Tether uses on its balance sheet: commercial paper, short-term debt issued by banks and corporations to cover immediate funding needs. Tether, for its part, remains extremely bullish – and has even suggested it may publish a formal audit of its reserves, something it said was “months away” in August 2021.

In late June, Tether announced another expansion: the introduction of the first GBP stablecoin. “We believe that the UK is the next frontier for blockchain innovation and the wider implementation of cryptocurrency for financial markets,” says Paolo Ardoino, the chief technology officer of Tether and Bitfinex. “Tether is ready and willing to work with UK regulators to make this goal a reality.” More regulation, and further market volatility, are a given. Popovich says he is still receiving donations. “I’m extremely embarrassed. Yesterday an anonymous person sent me $50 in the form of cryptocurrency. And I’ve never borrowed anything from anyone in my life. I’m scared and restless.”

Source: Crypto crisis: how digital currencies went from boom to collapse | Cryptocurrencies | The Guardian

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ETFs vs. Mutual Funds: How They Differ

Exchange-traded funds, or ETFs, and mutual funds are both investment products that represent a basket or collection of securities.”They provide investors access to underlying investments, like stocks or bonds, and generally provide more diversification than a single stock or bond,” said Wendy Liebowitz, vice president and branch leader at Fidelity Investments.

However, there are a few key differences between ETFs and mutual funds to keep in mind before investing. Here’s what you need to know:

ETFs differ in how they are traded

Greg McBride, chief financial analyst at Bankrate.com, explained that mutual funds only trade once per day, after the market close at a price based on the value of all the fund’s assets less the expenses. ETFs, as the name implies, McBride said, trade on an exchange and this means investors can buy or sell throughout the trading day at a price that fluctuates as the prices of the underlying investments change.

“Many fund companies offer both a mutual fund and an ETF version of the same investment, and the ETF is typically the lower-cost option in terms of expense ratio,” he said. “Just make sure your brokerage permits you to invest commission-free, as any brokerage commissions erase the modest expense advantage of ETFs.”

ETFs are more passive

Todd Rosenbluth, head of research at VettaFi, explained that similar to mutual funds, ETFs provide investors with the benefits of diversification, by owning stocks or bonds from numerous companies.

“However, most ETFs outperform mutual funds in the same investment style as they cost less and passively track an index like the S&P 500 or the Russell 2000 Index rather than try to pick winners but end up with laggards,” Rosenbluth said. “Most ETFs available track an index and are passively managed, while most mutual funds are actively managed with the team picking through a larger universe of investments.”

ETFs generally cost less

The fees you pay to purchase ETFs tend to be lower than mutual funds, but this does vary depending on the investments. A significant reason it’s cheaper is that an ETF is a passive fund.”ETFs tend to have a lower cost of ownership, with expense ratios often less than 0.20%, while mutual funds are often five times as expensive,” said Rosenbluth.

ETFs can offer tax advantages

Another difference to consider is tax efficiency. “Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account,” said Liebowitz with Fidelity Investments. Although both are subject to capital gains and dividend income tax, Liebowitz said ETFs generally have fewer taxable events than mutual funds.

Understand the ramifications of investing

Liebowitz stated it is important to review the portfolio fundamentals of any fund before investing. “While an ETF and mutual fund might have the same investment objective or investment ‘style,’ the composition of each fund could vary, so investors should compare the annual turnover ratio, concentration risk, expense ratio, and other risk factors to determine if it is right for them and what they are trying to achieve with their investment,” she said.

Despite their differences, Liebowitz explained that both mutual funds and ETFs can offer investors exposure to a diversified basket of securities to help meet their financial goals and objectives – and it doesn’t have to be one or the other. “Investors should pick the best choice for their specific investing needs, keeping their time horizon, risk tolerance, financial circumstance, and short- and long-term goals in mind before making any investment decision,” added Liebowitz.

Source: ETFs vs. mutual funds: How they differ | Fox Business

Critics by InvestorVanguard

ETFs and mutual funds both come with built-in diversification. One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there’s a chance that another is doing well. That could help reduce your risk—and your overall losses.

ETFs and mutual funds both give you access to a wide variety of U.S. and international stocks and bonds. You can invest broadly (for example, a total market fund) or narrowly (for example, a high-dividend stock fund or a sector fund)—or anywhere in between. It all depends on your personal goals and investing style.

ETFs and mutual funds are managed by experts. Those experts choose and monitor the stocks or bonds the funds invest in, saving you time and effort. Although most ETFs—and many mutual funds—are index funds, the portfolio managers are still there to make sure the funds don’t stray from their target indexes.

An ETF could be more suitable for you. You can buy an ETF for the price of 1 share—commonly referred to as the ETF’s market price. Depending on the ETF, that price could be as little as $50 or as much as a few hundred dollars. A mutual fund may not be a suitable investment. Mutual fund minimum initial investments aren’t based on the fund’s share price. Instead, they’re a flat dollar amount. Most Vanguard mutual funds have a $3,000 minimum. That would buy you 30 shares of a hypothetical fund with a net asset value (NAV) of $100 per share.

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