31.05.2022 Finance Luxembourg

Cryptocurrencies on the rise again, is it really good news for potential investors?

While cryptocurrencies seem to be on the rise again after trading in the red for months, financial institutions express their concern about their high volatility and are already working on EU regulation to mitigate the risks.

Investors’ demand for crypto-assets has been increasing

While they are widely known for their volatility, crypto-assets still attract many investors. Indeed, the world market capitalisation for cryptocurrencies surpassed 2,500 billion euros at the end of 2021 – seven times more than the previous year!

According to a recent study from the European Central Bank (ECB), one household out of ten had invested up to 5,000 euros on average in crypto-assets, with a slight predominance of smaller holdings – below 1,000 euros. Many ECB officials, like Executive Board Member Fabio Panetta or President Christine Lagarde, have already expressed their concerns, especially about people “who have no understanding of the risks, who will lose it all and who will be terribly disappointed, which is why we believe that it should be regulated.”

But despite financial institutions’ warnings, some investors got good news this morning: Bitcoin (BTC) posted its biggest gain since its drastic fall over the past few months as China eases Covid restrictions. The largest cryptocurrency advanced as much as 4,5 % to $30,595 on Monday at 7:00 p.m. Ethereum (ETH) and smaller tokens like Avalanche (AVAX), which got pummeled last week even as Bitcoin held relatively steady, were also up.

Towards a new EU regulation to mitigate the risks? 

Given the speed of crypto developments and the increasing risks, it is important to bring crypto-assets into the regulatory perimeter and under supervision as a matter of urgency.

Although the Commission already introduced a sound legal framework for crypto-asset markets to develop within the EU in September 2020 – with the so-called MiCA regulation – agreement on this is yet to be reached. According to the ECB, the implementation of the new regulation should take at least 18 months after its adoption, meaning not before 2024 at the earliest.

Until then, unless you are a sophisticated investor, such as a hedge fund, or are prepared to swallow a hefty loss, it is best to steer clear.