Regulators are closely monitoring developments


Systemic risks are usually referred to as the danger of the collapse of the entire system, not just its individual components. This also applies to the financial system; the collapse of individual elements of the system can be localized and not allowed to spread to the entire network.

The total value of cryptocurrencies is still below the market capitalization of the largest company represented by Apple, which means that the possibility of their collapse creates a minor systemic risk for the financial system.

However, if digital assets continue to grow at the current pace, the situation may change. A repeat of the 2021 rally could push capitalization to the 6.447 trillion mark by the end of 2022, and in this case, regulators are likely to take measures to prevent systemic risks.

Governments do not intend to lose control over the money supply

While officials around the world cite systemic risks as the reason why cryptocurrencies should be restricted, there is another explanation for their rhetoric.

Governments draw strength from their armed forces and the ability to control citizens’ wallets. By increasing or reducing the money supply, they stimulate or restrain economic growth. The growth of the market capitalization of cryptocurrencies occurs at the expense of fiat currencies, the value of which is based on trust in their issuers.

Governments are unlikely to give one of the pillars of their power to ordinary people, whereas this is exactly what the “ideologists” of cryptocurrencies want to achieve.

The higher the capitalization of cryptocurrencies, the higher the probability of government intervention. In 2021, hedge fund manager Ray Dalio described what was happening very accurately:

“If they [cryptocurrencies] become too successful, they [the authorities] will kill them and they will try to do it. And I think they will kill them because they have ways.”

Further growth of cryptocurrencies in 2022 could set the stage for an epic battle between a new asset class and governments, which will cause a surge in volatility. Invest only the capital that you can afford to lose, because fighting governments is a dangerous game.

The turning point may be the growth of the market capitalization to 3-5 trillion dollars. The authorities are not ready to give up control over the money supply, which makes cryptocurrencies dangerous for them.

Meanwhile, digital paper currencies may become a new compromise for financial technologies, but ideological differences will continue to act as “hot spots” on the financial battlefield.