Bitcoin has made billionaires out of inexperienced investors. We often thought Bitcoin’s price couldn’t go any higher, but it does.

New coins and cryptocurrency exchanges flood the market, attempting to entice the average investor. It’s naturally appealing, but it’s also challenging to grasp.

Why Use a Safety Net in Crypto Collapses?

According to famous short seller James Chanos, cryptocurrencies are risky assets during a crisis. Their worth is debatable and unsupported by any government.

“Those who believe that you need to own digital currency as a store of value in the worst-case scenario, that is precisely the case in which a digital currency will work the least, Chanos explained in an interview with the Institute for New Economic Thinking. “If the grid goes down, the last thing I’d want to own is Bitcoin.”

Chanos, who shorted Enron before the company’s massive accounting fraud was revealed, is skeptical that Bitcoin and other cryptocurrencies will eventually replace fiat currencies. There could even be a bubble about to pop.

This is simply a security speculation game masquerading as a monetary policy technological breakthrough. Of course, the opposing view is that digital currencies are the way of the future, though it’s difficult to predict which ones will emerge as viable alternatives to cash. In the meantime, it’s worth keeping an eye on companies that invest in the underlying blockchain technology or a basket of cryptos. But, if you hold a diverse portfolio of securities to avoid being burned by a single, concentrated holding, you have a better chance as an investor.

What Does “No Safety Net” Mean?

Investing in cryptocurrencies could result in the loss of all your money because there is no state-sponsored protection, Germany’s financial regulator BaFin warned retail investors in the last week of October 2022, reinforcing previous warnings.

Generally, the main risk of trading cryptocurrencies is their volatility. This statement is backed by Bitcoineer official, and they mention that cryptocurrencies are high-risk and speculative, and you must understand the risks before you begin trading. They are volatile, and unexpected changes in market sentiment can cause sharp and sudden price movements. It is not uncommon for the value of cryptocurrencies to plummet by hundreds, if not thousands, of dollars in a matter of seconds.

In Germany, whether you get your money back from failed crypto projects is determined by the details of insolvency law and the exact terms of the service, according to BaFin, in an amendment to a February 2022 warning on crypto investments.

Even if you have no plans to relocate to Germany anytime soon, this advancement in tax laws should excite crypto investors everywhere, considering that Germany has the largest economy in Europe. For an economic superpower of this size to formally define and recognize various sectors of the crypto economy is exactly the type of progress that promotes widespread cryptocurrency adoption. Early investors will benefit from increased demand and higher prices, creating a win-win situation.

Recent failures, such as that of cryptocurrency lender Celsius Network, have resulted in messy bankruptcy cases in which ex-customers must fight for their money as part of lengthy legal proceedings.

Suppose trading platforms or wallet providers fail or go bankrupt. There is “no protection covering customer losses, such as deposit guarantee schemes or investor compensation schemes,” according to a BaFin statement. “Such systems for crypto assets do not exist.”

By way of comparison, traditional bank holdings are typically insured up to the value of 100,000 euros ($99,000) under European Union (EU) law — a move designed to protect consumers and prevent market panic from escalating into a bank run.

The EU recently reached a political agreement on the Markets in Crypto Assets Regulation (MiCA), which is intended to regulate cryptocurrency and protect consumers, but it is not yet in effect.

Meanwhile, the EU’s financial watchdogs have warned prospective buyers to avoid get-rich-quick schemes that seem too good to be true.

Crypto investors should view the market crash as a “cautionary lesson” for putting money into risky, unregulated assets and should not expect a bailout, according to Europe’s top securities regulator.

Innovations are coming thick and fast, and regulators who do not try to understand the technology, support its development, and regulate it appropriately endanger their economies’ growth. Forward-thinking regulators, such as BaFin, have been successful because they sought to understand the technology’s potential. Federal Financial Supervisory Authority  (BaFin) in Germany has developed a broad understanding and position that will be applicable for years to come by engaging with entrepreneurs and innovators of all sizes rather than just the big players. If the SEC wants to know what  DeFi is in the United States, it can look at use cases in Germany and how they work in practice. It will discover a fully-fledged regulatory blueprint to adhere to.

Byline: Hannah Parker