Why Crypto Investors Should Pay Attention to Wall Street’s Recent Market Manipulation Scandal
In money-related industries, there are many scandals bound to happen. Especially when high sums of money are involved. Reactions are varied to these incidents. Some are amused, some are dissapointed and some are worried that their investments might suffer. The most rational thing to do is certainly to take interest in what’s happening and learn from the mistakes made by others, so you don’t repeat them yourself.
What happened on Wall Street and what can crypto investors learn from this?
Long Story Short
The US authorities recently arrested and charged Bill Hwang, a high net-worth businessman, with market manipulation, fraud, and racketeering crimes. Last March, Hwang’s New York-based business went down and left several banks worldwide with over $10 billion in losses.
Before its phenomenal collapse, his company boasted $36 billion in assets. However, the company defaulted on margin calls caused by high leverage equity derivatives positions. Being among the most fascinating fund blow-ups in the recent past, the scandal triggered massive disposal of stocks. Moreover, lenders, many different banks involved, lost billions of dollars as well.
In light of this, what were the financial mechanics behind the actions of Hwang and the lessons that crypto traders and investors need to take from this scandal?
So, how did we get here?
Hwang got too much equity exposure by lying to banks about his company’s creditworthiness. Hwang used the borrowed money to buy large stocks in about 10 companies. This buying was intended to manipulate the underlying share prices and ratchet up the company returns. Specifically, his company borrowed money to buy stocks; the buying pushed the stock prices up, automatically giving his company paper profits.
In a nutshell, Hwang used equity swap leverage to manipulate stock prices in companies he invested in. At that time, the leverage produced incredible results for Hwang’s own company, with profit reaching over 1000% before the it went under.
Important Lessons for Crypto Investors
A parallel can be drawn between the Hwang’s company and crypto-assets backed in specific ways. A grave danger lurks when investors concentrate their portfolios on an asset that can go under due to a liquidity crisis. The main lesson is to exit liquidity. As a token holder, be careful not to be in the same place as the banks Hwang borrowed from; being trapped in a token as it goes down.
Moreover, some mechanics of crypto valuation, specifically the founders’ rewards and pre-mines, can lead to market manipulation, similar to the Hwang case. The large blocks of untraded tokens create a false perception of high demand/low supply scenario, which inflates the value of the coins, similar to what Hwang did to his company’s portfolios. This misleading information can culminate in fraud and retail investors getting ripped off.
Whether Hwang is a criminal or he just took advantage of the loopholes in Wall Street will be proved in court. Nonetheless, Hwang would not have been able to manipulate the market that much if he was dealing with cryptocurrency instead of stocks. At least crypto has the benefits of transparency and security, particularly because of blockchain technology. Still, crypto traders and investors need to learn from this case and avoid a replay of the Hwang scandal in the crypto space.
As long as investors are careful what coins and tokens they buy and choose a reliable exchange partner, there’s not much that can go wrong. With the second part, IXFI’s got you covered. Register now on Your Friendly Crypto Exchange and take your trading to another level.
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