The recent phenomenon of people moving their assets into crypto as a safe haven in responding to the financial crisis has drawn the attention of the academic world.
Per an Oxford University Law Faculty blog post from April 17, researchers have observed that crypto trading could pose a threat to traditional finance and it should be strictly regulated in the times of crisis to prevent systemic risk to the system.
Investors in cryptocurrencies respond to global crises
Researchers say that as crypto transactions are decentralized and don’t rely on any central authority, investors tend to move their capital into crypto when they lose their trust in governments and banks in order to secure their funds.
The researchers examined the trading volumes between Jan. 1 and March 11. They found that the top 100 cryptocurrencies increased along with the number of reported COVID-19 cases. However, this positive correlation reversed when people started to respond more positively towards the traditional financial market.
Herding behavior may cause systemic risk
Researchers argued the cryptomarket shows high volatility, crashes, and bubbles, phenomena which can possibly be explained through herding behavior where a large group of investors behaves similarly. They also described the current crypto market as lightly regulated and lacking in transparent information.
The crypto market depends heavily on “market influencers” such as designated Telegram channels and websites detecting market movement by “whales.” Asymmetric information may attract investors into “pump-and-dump” schemes. The blog says:
“Sophisticated investors lure uninformed investors into the cryptomarket by creating an artificial demand for tokens and then swiftly selling their tokens, leaving the uninformed investors with a loss.”
Researchers worried that if uninformed investors engage in herd behaviour this could lead to a market crash. Since the traditional financial market has now related to the cryptomarket and the crypto market is likely to stay, regulators may need to act fast to regulate the cryptomarket to prevent the systemic risk of the traditional financial system.
As Cointelegraph reported previously, the members of the J5 countries recently updated their crypto laws in response to cybercriminals operating during the pandemic. Other research recently showed that crypto prices responded well to clear regulation.