Cred Crypto: A Smart Investment Move?

Cred is a micro-investing platform for cryptocurrency, aiming to solve the main issues that mass consumers face with cryptocurrency: ease of access, transparency, and understanding. Investing in cryptocurrencies is risky due to potential high losses from security breaches. Cred itself filed for bankruptcy in November 2020, blaming fraud by an outside party. However, former employees highlight the risks of the budding crypto lending market, including a lack of transparency.

Despite the risks, cryptocurrencies and the blockchain industry are growing stronger, with investors increasingly able to access institutional-grade custody services. So, is Cred crypto a good investment? Well, that depends on several factors, including your risk tolerance, investment goals, and the overall market conditions.

Cred's bankruptcy and the risks of crypto lending

Cred's Bankruptcy

On November 10, 2020, Cred Inc. filed for Chapter 11 bankruptcy, leaving hundreds of depositors who had loaned the company more than $100 million worth of crypto wondering if and when they would get their money back. The company primarily blamed its bankruptcy on alleged fraud by an outside investment manager, but former employees and customers pointed to additional factors, including conflicts of interest and mismanagement by Cred's executives.

The Risks of Crypto Lending

The collapse of Cred, a crypto lending firm, underscores the risks inherent in the crypto lending market. Crypto lending involves lending cryptocurrencies or fiat currencies backed by crypto assets to borrowers, often at high interest rates. While this can offer high returns, there are also significant risks, as the Cred case illustrates.

One of the key risks in crypto lending is fraud and mismanagement. In the case of Cred, the company's bankruptcy was triggered by alleged fraud by an outside investment manager, as well as conflicts of interest and poor decision-making by Cred's executives. Crypto investors and lenders need to be aware of the potential for fraud and misconduct in the industry and perform thorough due diligence before entrusting their funds to any entity.

Another risk highlighted by the Cred case is the lack of regulatory oversight in the crypto lending space. At the time of Cred's collapse, the company was promising its customers insurance that it never actually had. This underscores the importance of regulatory frameworks and consumer protections in the crypto industry, which are still lacking in many jurisdictions.

Additionally, the Cred case demonstrates the risks associated with the volatile nature of the crypto market. Cred's troubles began with a sharp crypto crash in March 2020, which led to losses for the company and made it difficult to recover funds loaned to other entities. Crypto investors and lenders need to be aware of the potential for rapid and significant losses due to market volatility.

In conclusion, the Cred bankruptcy case serves as a stark reminder of the risks associated with crypto lending. While the crypto lending market can offer high returns, it is crucial for participants to carefully consider the potential downsides, perform thorough due diligence, and advocate for stronger regulatory frameworks to protect consumers.

Crypto ETFs as a safer investment option

Crypto ETFs, or exchange-traded funds, are a more accessible way to invest in cryptocurrencies. They allow investors to gain exposure to the crypto market without buying, storing, and managing the digital assets themselves. Crypto ETFs trade on behalf of investors, buying cryptocurrencies or other digital assets and storing them.

There are two types of crypto ETFs: spot crypto ETFs and crypto futures ETFs. Spot crypto ETFs invest directly in cryptocurrency and trade on behalf of investors. Crypto futures ETFs, on the other hand, do not hold digital tokens. Instead, they invest in crypto futures contracts, which are standardized agreements to exchange a specific quantity of assets on a particular day for a preset price.

Crypto ETFs offer several advantages over direct investment in cryptocurrencies. They provide diversification, as crypto is a unique asset class. They are also simpler for most investors, as buying shares in an ETF does not require the technical knowledge and complex procedures associated with buying and holding crypto directly. Additionally, with crypto ETFs, investors do not need to worry about storing their security keys safely or moving assets between different types of storage.

However, there are also some drawbacks to consider. Crypto ETFs tend to have higher fees than direct crypto investments. Investors do not own the crypto tokens directly, and they must defer to the fund's management strategy, which may limit more complex or precise investment strategies. The volatility and unregulated nature of the crypto market also pose risks, and crypto ETFs can only be traded during regular market hours, unlike crypto exchanges, which often run 24/7.

Overall, crypto ETFs can be a safer investment option than direct crypto investments, as they reduce the expenses and risks associated with owning crypto tokens. They are a good choice for investors who want exposure to the crypto market without the complexity and risks of direct ownership.

Crypto's extreme volatility

Volatility refers to the changes in the price of an asset and can be healthy or extreme. Extreme volatility occurs when an asset's price fluctuates rapidly within a short period. Crypto markets exhibit extreme volatility, with skyrocketing peaks and depressive troughs occurring much more quickly and extremely compared to prices of assets in mainstream markets. For example, in 2016, the price of Bitcoin rose by 125%, and in 2017, it rose again by more than 2000%.

The lack of intrinsic value in cryptocurrency contributes to its volatility. Crypto's value is based on speculation and how much people are willing to trade for it, making its price sensitive to slight changes in investors' expectations. Additionally, crypto markets have less liquidity than traditional financial markets due to the absence of a robust ecosystem of institutional investors and large trading firms. This lack of liquidity, combined with heightened volatility, creates a risky investment environment.

However, it's important to note that crypto volatility may be reaching a turning point. Institutional investors and trading firms are entering the market with more conviction, and a derivatives market for cryptocurrencies is also taking shape. As the asset class matures, it is expected to exhibit more moderate volatility.

Despite the risks, cryptocurrencies and the blockchain industry are gaining traction, with increasing adoption by companies and investors. While crypto is a volatile investment, it can be a good addition to a diversified portfolio if proper research and caution are exercised.

Crypto's regulatory landscape

The regulatory landscape for cryptocurrencies is complex and rapidly evolving. While crypto markets do not currently pose a risk to financial stability in most jurisdictions, the International Monetary Fund (IMF) has highlighted the need for a comprehensive policy and regulatory response to address the risks associated with crypto assets. The IMF has been actively engaged in this area, publishing several reports and policy papers on the impact of crypto on macroeconomic stability and the elements for effective crypto policies.

In the United States, several regulators such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN) have issued guidance and rules affecting cryptocurrencies. However, the regulatory environment for lending practices in the digital assets space remains unclear and may change rapidly, particularly in states that have not defined the legal status of cryptocurrencies.

The regulatory landscape for crypto assets also varies internationally. Many emerging economies lack effective legal and regulatory oversight, creating potential risks for stablecoins denominated in foreign currencies. The lack of legal provisions for "bankruptcy remoteness" in these countries can lead to the commingling of reserve assets, which are often managed by custodians in advanced economies. This can result in capital outflows from local banks in emerging economies, potentially triggering higher volatility for the local currency and exerting pressure on macroeconomic growth.

To address these challenges, the IMF has deepened its cooperation with the Financial Stability Board (FSB) and other standard-setting bodies worldwide. The FSB has provided important recommendations and standards for the regulation and supervision of crypto assets, which the IMF has incorporated into its surveillance work. Additionally, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) have also set standards for fintech and crypto regulation.

Overall, the regulatory landscape for cryptocurrencies is dynamic and evolving. While efforts are being made to establish robust global standards and recommendations, the specific regulations and their enforcement vary across jurisdictions. As the crypto industry continues to grow and evolve, regulatory authorities will likely play an increasingly important role in shaping the future of this innovative sector.

Crypto's environmental impact

Crypto-assets are digital assets that are implemented using cryptographic techniques. They can require a lot of electricity, which can result in greenhouse gas emissions, as well as additional pollution, noise, and other local impacts on communities living near mining facilities.

The White House published a report in 2022 examining the challenges and opportunities of crypto-assets for the United States' clean energy and climate change goals. The report found that the annualized electricity usage from global crypto-assets grew rapidly between 2018 and 2022, with estimates of electricity usage doubling to quadrupling. As of August 2022, the total global electricity usage for crypto-assets is estimated to be between 120 and 240 billion kilowatt-hours per year. This is equivalent to 0.4% to 0.9% of annual global electricity usage, and is comparable to the annual electricity usage of all conventional data centers worldwide.

The dominant consensus mechanism for crypto-mining is called Proof of Work (PoW), which is used by the Bitcoin and Ethereum blockchains. Bitcoin and Ether combined represent more than 60% of the total crypto-asset market capitalization. The PoW mechanism is designed to require more computing power as more entities attempt to validate transactions for coin rewards, which helps to disincentivize malicious actors from attacking the network. As of August 2022, Bitcoin is estimated to account for 60% to 77% of total global crypto-asset electricity usage, and Ethereum is estimated to account for 20% to 39%.

The energy efficiency of mining equipment has been increasing, but electricity usage continues to rise. Other less energy-intensive crypto-asset ledger technologies exist, such as Proof of Stake, which could dramatically reduce overall power usage to less than 1% of current levels.

The United States is estimated to host about a third of global crypto-asset operations, which currently consume about 0.9% to 1.7% of total U.S. electricity usage. Crypto-asset mining is also highly mobile. The United States currently hosts the world's largest Bitcoin mining industry, totaling more than 38% of global Bitcoin activity, up from 3.5% in 2020.

The growth of energy-intensive crypto-asset technologies could hinder the ability of the United States to achieve its National Determined Contribution under the Paris Agreement and to avoid the most severe impacts of climate change. Broader adoption of crypto-assets and the potential introduction of new types of digital assets require action by the federal government to encourage and ensure responsible development. This includes minimizing negative impacts on local communities, significantly reducing energy intensity, and powering with clean electricity.

Cryptocurrency mining requires energy, equipment, internet, and a global networking infrastructure to be useful. It has a large environmental impact, with some networks using as much energy as small countries to maintain a blockchain. There are concerns about cryptocurrency's water and waste footprints, as well as the generation of significant electronic waste as mining hardware quickly becomes obsolete.

According to a report by the White House, cryptocurrency mining accounts for 140 million metric tons of CO2 per year released into the atmosphere, or 0.3% of all global greenhouse gas emissions. This amount is greater than the emissions produced by many individual countries, including Argentina and the Netherlands. The competitive nature of blockchain mining is also an issue, as the resources invested by miners who do not win the algorithmic race are wasted.

Cryptocurrency mining utilizes the most readily available energy sources, and in some cases, miners are paying to revitalize dying fossil fuel plants to get electricity faster. Additionally, the computer chips used to mine cryptocurrency are made with toxic chemicals and precious metals that require literal mining to produce, depleting finite resources. These chips also become obsolete quickly as crypto mining strategies evolve, ending up in landfills.

Cryptocurrency mining operations can also generate air, water, and noise pollution in the communities where they are located, forcing local residents and businesses to bear the burden while crypto corporations turn a profit.

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