Introductory Part: The recent downturn in crypto has left many investors and businesses stunned, but it appears that a technical glitch was at the core of the meltdown. You might wonder what lessons small and medium-sized enterprises (SMEs) can pull from this calamity. In the sections below, I shall attempt to answer that query by dissecting the event and its implications.
What sparked the crypto crash?
According to Tom Lee, the Director of Research at Fundstrat, the latest downturn was ignited by a stablecoin mispricing. It led to the automated liquidation of around 2 million different accounts. The original mispricing was an astronomically small error. The stablecoin that usually equals $1 dipped to $0.65 due to a fleeting liquidity void on a trading platform. It wasn’t until this past week that the error was corrected, but by then it was too late. Such events had already caused destructive forced liquidations.
Fundamentally, it was not a rejection of digital assets. It was a glitch in the automated trading system. As liquidity evaporated, market makers had to de-risk aggressively and that pushed prices further down even after the glitch was solved, thus leading to questions about the resilience of the cryptosphere to disruptions like this one.
How did automated systems cause the downturn?
Again, it was the automated trading systems that undoubtedly made the whole situation worse. When the glitch filled an exchange’s Automatic Deleveraging engine, it set off a series of automatic liquidations that caused profitable traders to go insolvent on paper within minutes. The incident underlines a major flaw in such trading systems: the pace of their operation far outstrips human judgment, allowing minor errors to cause massive repercussions.
The resulting cascade spread far and wide, impacting liquidity across the market. The diminished liquidity halted, causing prices to continue to slide for weeks even after the glitch was repaired.
What can SMEs learn?
There are critical lessons here for European SMEs.
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Diversify your holdings. To mitigate the risks similar to how crypto investors should diversify a portfolio, SMEs ought to consider diversifying their asset holdings.
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Monitor market indicators. Pay attention to institutional flows and other market indicators, for example, ETF outflows can serve as a signal of volatility.
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Avoid panic selling. Do not panic sell. It can backfire and cost you dearly. Focus on long-term fundamentals and stay steady in the face of short-term market fluctuations.
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Know the regulatory landscape. As the crypto landscape exists under evolving regulatory measures, SMEs can always stay up to date on compliance requirements to navigate challenges.
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Use blockchain technology. This awesome tech can help expedite transaction processing and improve liquidity management.
How will regulatory awareness help?
Understanding the regulatory landscape is essential for SMEs in the crypto space. Knowing the regulations can help proactively prepare for compliance challenges that might arise. For example: the Markets in Crypto-Assets (MiCA) regulation in Europe aims to provide a comprehensive structure for crypto assets, making it easier for SMEs to navigate regulatory challenges.
By keeping informed on regulation, SMEs can be better equipped to deal with disruptions and remain compliant.
How can SMEs mitigate risk?
There are plenty of strategies that European SMEs can adopt to enhance liquidity management and mitigate risks.
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Implement strong risk management practices. Establish robust risk management frameworks and monitoring levels of leverage are key to managing liquidity.
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Utilize stablecoins. Stablecoins can be used for transactions and managing liquidity to minimize volatility.
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Prepare crisis management plans. This includes halting operations in cases of extreme volatility.
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Educate and train employees. This gives them the tools they need to better understand the risks and best practices of trading crypto.
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Collaborate with industry peers. Working with others in your field can help you access shared knowledge and collective problem-solving.
In conclusion, the recent crypto crash is a warning of the vulnerabilities of automated trading systems and stresses the need for robust liquidity management strategies. By learning from this, SMEs can get a better handle on future fluctuations and instability in the crypto industry.
