Understanding the Risks in the Cryptocurrency Market


Director, Computational Finance & Risk Management (CFRM) Program

There is a recent article on Al Jazeera (English) with the title “Is Crypto About to Go Extinct?” that examines the current state of the crypto market in view of the recent fallout of FTX and the crypto market crash and discusses the future of cryptocurrency. Professor Tim Leung, who has written research articles on cryptocurrency price dynamics and taught a cryptocurrency course at University of Washington, was interviewed and quoted multiple times throughout the article.

He said that the FTX crash had a profoundly negative impact and warned of spillover effects throughout 2023. In addition, crypto mining companies, which generate virtual money – or coins – using energy-guzzling supercomputers, will suffer under the current market conditions, Prof. Leung said.

Cryptocurrency advocats champion the independence of the cryptocurrency from the government and banking systems, but it also depends on financing from traditional markets. How much of that funding will continue or grow in the current climate is unclear.

Reduced demand for coins because of low trading volumes and high energy prices will squeeze the viability of their business model. “I see this phase lasting through 2023,” he said. “It’s more likely to be a crypto ice age rather than a crypto winter.”

Many crypto firms have a footprint across multiple geographical regions. Prof. Leung called for an internationally coordinated effort to design and enforce regulations in the sector.  “A global framework to regulate crypto is indeed essential,” he said.

Tim Leung, Boeing Professor of Applied Mathematics and Computational Finance & Risk Management (CFRM) Director at the University of Washington in Seattle. He has worked on a variety of problems, such as derivatives pricing, algorithmic trading, exchange-traded funds (ETFs), commodities and cryptocurrencies, and has published over 60 articles and several books. On cryptocurrency, his work includes a journal article on constructing cointegrated portfolios of cryptocurrencies. He pioneered an approach to analyze cryptocurrency price evolution using a multiscale decomposition method that is adaptive to the time-varying volatility of cryptocurrency. For more on his work and contact information, visit http://faculty.washington.edu/timleung/

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Computational Finance & Risk Management, University of Washington and is being posted with permission from Computational Finance & Risk Management, University of Washington. The views expressed in this material are solely those of the author and/or Computational Finance & Risk Management, University of Washington and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Digital Assets

Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.