The “tort law”, which allows an injured party to claim damages from their wrongdoer, lies at the heart of the modern concept of natural law. Reparations are part of the same scheme of things.
Although the term “reparation” is stronger than compensation, the former suggests the conduct of the wrongdoer was willful and accompanied by vested interests.
Does this concept have any role to play in the world of cryptocurrency investment? One may say so.
The rising rush of retail investors in the crypto market
In the exponentially growing and evolving realm of cryptocurrency, influential players including billionaire CEOs and big institutions, have – advertently or inadvertently – influenced retail investors to pick stakes.
Robinhood, a commission-free broker-dealer, reported in February 2021 it saw a whopping six million new investors sign up for its cryptocurrency trading services in the first two months of this year. To put this into perspective, the brokerage app’s crypto investment vertical saw an average of about 200,000 new clients every month in 2020.
Ahead of its stellar debut on NASDAQ, popular crypto exchange Coinbase revealed retail investors contributed a trading volume of US$ 32 billion in the last quarter of 2020, as against its institutional volume of US$ 57 billion. While the figures point at the expanding numbers of institutional customers in the crypto space, it is also worth noting the trading volume growth rates of each of the segments were roughly the same in 2020.
This shows retail investors, cutting across developed and emerging market economies, are flocking to the crypto market in large numbers. But a critical aspect to note here is, while offsetting risks by hedging is a routine job for institutional investors, most retail investors fail to do the same for their risky investments.
Multi-billionaire Tesla CEO Elon Musk revealed his diversified crypto holdings in the recently held ‘B Word’ Conference, although he did not reveal his hedging techniques.
The paradigm shift in cryptocurrency investments that has been registered over the past year has elevated cryptos from being a fringe asset to a mainstream option. This wide acceptance was further noticed as Canada greenlit the world’s first bitcoin exchange-traded fund (ETF) in February this year, followed by Brazil’s approval a bitcoin ETF in the country, making it the second country in Americas to jump on to the bandwagon.
The mainstreaming goes on, unabated
As these events dominated headlines, the status of cryptocurrencies catapulted. In April, Bitcoin touched a value of nearly US$ 65,000 apiece on the back of exceptional demand.
Mr. Musk’s rave reviews of Dogecoin, on the other hand, has caught quite a bit of attention too. In a tweet, the billionaire has confirmed working with the token’s developers to “improve [its] transaction efficiency”. What followed was a buying rush for Dogecoin, which is up a whopping 4,800 per cent on a year-to-date (YTD) basis.
What interrupted the wild rally in cryptos, however, was the crackdown in China and other countries. Bitcoin lost nearly half its value in virtually no time, while Dogecoin, which was trading at US$ 0.72 on May 8, plunged to US$ 0.16 by July 21.
Investment giant JPMorgan Chase recently allowed its clients to trade in cryptos. And according to some reports, Amazon is likely to start accepting payments in cryptocurrencies. On the back of these favorable developments, cryptos have reclaimed some lost ground.
Amid these massive price fluctuations, the ride for retail investors has been anything but steady. Some may have made money, but many lost quite a bit too.
There seems to be a sense of FOMO (fear of missing out) among retail investors when it comes to the crypto market. Add to this the growing ‘hold on for dear life’ (HOFL) phenomenon. This relates to investors refusing to book profits or curb losses on their investments. For them, cryptos are a long-term game, and during bearish trend, they buy more of it.
Social media campaigns by trading platforms may have been the initial catalysts in drawing the attention of retail investors to cryptocurrencies, but it now seems to be the wide mainstream coverage of every minute development in crypto space.
Could retail investors claim reparations?
While one part of the internet world debates about the oldest crypto coin becoming its ‘native currency’, Square CEO Jack Dorsey hopes Bitcoin helps bring about “world peace”, as he said at the recent ‘The B Word’ webinar.
Amid these high hopes, the question that remains unanswered is, who will compensate the retail investors who are being inspired to park their funds in the volatile asset?
In February, a federal judge ordered Facebook to pay US$ 650 million in settlement to its users in Illinois for having violated their privacy. A single user could claim US$ 340, according to estimates.
This was not the first instance where a company lost a class action lawsuit. Such suits, like the one filed against San Diego-based Scripps Health following a cyberattack and loss of patients’ data, cover cases where the plaintiff has a clear relationship with the defendant.
In the case of cryptocurrencies, there is no express or implicit relationship between amateur retail investors and big institutions, as they cautiously draft the terms of investment in order to shift the entire risk to the client.
Although there is no certainty as to what will happen to crypto assets in medium to long-term, the question of reparation arises if the harshest of warnings come true. What if the bubble bursts?
It is reasonable to assume that many retail investors forayed into cryptos following the mainstreaming of the sector.
Had it not been for bitcoin ETFs, indices like S&P and Dow Jones tracking cryptos, big banks allowing access and influential billionaires claiming to hold such assets, would the rush of retail investors have been so substantial?
It is, at the same time, reasonable to assume that institutional investors and billionaires have hedged their risky crypto investments, besides adopting the traditional strategy of not putting all eggs in a single basket. Meanwhile, retail investors are left at a disadvantage amid the volatility of the crypto space.
Does a question of reparations arise in such cases? Probably yes, if the former played a decisive role in influencing investment decisions of the latter, and if this conduct of the wrongdoer was willful.
But who is to be blamed for the injury, and who shall pay damages? For now, the debate is open.
