The legal implications of crypto bubbles

From the spectacular collapse of the crypto brokerage FTX to the drama surrounding Elon Musk’s ownership of Twitter, the legal implications of crypto bubbles have come into the forefront of public thinking and rightly so. Crypto ownership is surging in the UK with 9.8 million Britons adopting it and with the total transactions in the market during 2021 amounting to £123 billion.

Concerns over the safety of cryptocurrencies as an investment class have been raised by the Financial Conduct Authority (FCA), which describes them as “very high-risk, speculative investments”. There’s a lot to consider when it comes to the legal implication of crypto bubbles and assets, and we’ll unpack some of these together.

Photo by Jievani Weerasinghe on Unsplash

How big was the crypto bubble?

Crypto bubbles refer to when excitement over a specific asset leads to a rapid price increase and as more people invest, the asset’s price will surpass its hypothetical value. But this bubble can burst just as quickly, leaving investors out of pocket for thousands.

The bitcoin crypto bubble is a prime example of this. In November 2021, bitcoin was worth a record high of £48,000 but when the cryptocurrency market crashed, its price dived to just £26,000 at the end of January 2022.

The legal implications

A significant disadvantage to investing in cryptocurrencies is that they aren’t regulated, and they are not recognised as a currency worldwide. This has led financial watchdogs like the FCA to warn potential investors that they could lose all their money and have no recourse to compensation if something goes wrong.

When FTX collapsed, many individuals experienced significant losses with about $8 billion still owed to depositors, many of which were institutions. Within a period of a few days, FTX went from a vanguard of cryptocurrency to a collapsed company facing a class-action lawsuit on behalf of investors.

Protecting your investment is by far the most important thing to do if your business is looking to deposit money into any crypto asset. Many companies are turning to crypto and blockchain lawyers that specialise in this evolving sector to receive benefits like decentralisation of transaction validation, transparency, and immutability when it comes to their investments.

Will the crypto bubble recover?

This period after the crypto bubble bursts is referred to as crypto winter and on average, it lasts for four years so investors shouldn’t expect to see improvements until at least 2026.  Although, there are doubts that it will ever recover at all.

However, like the technology before, it’s likely to bounce back eventually but there are no guarantees when it comes to investing. The collapse of FTX and crashes in bitcoin have shaken investor confidence in the industry but this sector has survived catastrophic crashes before.



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