Crypto's Wild West moves need taming

The new element in the latest crypto crash - bitcoin (BTC) fell over $5,200, or nearly 7%, in just 2 hrs on Monday - is the presence of institutional investors in the market. This represents 'normal' money in the crypto system, which tends to react normally to market fluctuations. Attitudes towards risk, thus, become normalised, with unforeseen consequences for cryptocurrencies that have a predictable boom-bust cycle. One, share of crypto diehards has shrunk, making recovery difficult. Two, the correction can deepen with institutionalised risk management at play. Besides, crypto adoption is stalling, and that affects the bullish argument for the asset class. The crypto market is acquiring a bias for deeper dives and shallower climbs. Unless participants can fix the lopsided market, regulators will have to step in.

Odds are the crypto market will find its feet because of factors causing the tilt. More normal money flowing in will dampen crypto riskiness. Stablecoins will also achieve the same effect by allowing crypto functionality, while curbing fluctuations. These will also improve crypto adoption. Ultimately, cryptos have the potential to morph from an asset class into currency. So, the evolutionary path will be well-defined in terms of regulation. The speculative element in crypto trade will have to conform to risk-reward trade-offs that the broader financial markets are comfortable with.

Cryptos need to be regulated for financial stability and cybersecurity. This must be a coordinated effort because of the interconnected nature of financial markets and globalised threats to cybersecurity. Crypto markets should benefit from deepening via institutional presence. Swift enforcement action in cases of manipulation also brings down the Wild West quotient of cryptos. The financial structure is becoming decentralised, and cryptos are becoming stores of value as regulators amp up risk mitigation. The rollercoaster rides crypto investors are accustomed to may lose some of their intensity, which is good for the world's youngest asset class.