Unbacked cryptos lack intrinsic value and have no backing reserves or price stabilisation mechanisms. [17] This makes them inherently highly volatile and unsuitable as a means of payment. Bitcoin, for instance, exhibits volatility levels up to four times higher than stocks, or gold (Chart 2). Chart 2 Price volatility of cryptos compared with other assets (annualised seven-day rolling standard deviation of daily percentage changes of prices)  Sources: CryptoCompare, Bloomberg, Refinitiv and ECB calculations. Notes: The data are for the period from 1 January 2015 to 15 June 2023. For visibility reasons, the maximum of the yaxis for Chart 2, panel b is set to 5. Nevertheless, on 30 and 31 January 2021 the price volatility of DOGE exceeded 28. Oil data refer to the European Brent Spot price. The altcoins’ names are abbreviated as follows: Bitcoin (BTC), Ether (ETH), Polkadot (DOT), Ripple (XRP), Cardano (ADA), Litecoin (LTC), Chainlink (LINK), Dogecoin (DOGE), Binance Coin (BNB), Bitcoin Cash (BCH), Uniswap (UNI), Solana (SOL). Such high volatility also means that households cannot rely on crypto-assets as a store of value to smooth their consumption over time. Similarly, firms cannot rely on crypto-assets as a unit of account for the calculation of prices or for their balance sheet. Moreover, unbacked cryptos do not improve our capacity to hedge against inflation. Indeed, their price developments exhibit an increasing correlation with stock markets (Chart 3). And empirical analysis finds that momentum in the crypto-asset market and global financial market volatility do have an impact on bitcoin trading against fiat currencies.

The repercussions of this event rippled through the crypto ecosystem, causing cascading liquidations[25] that underscored the interconnectedness and opacity of crypto markets. Ultimately, it showcased how swiftly confidence in the industry could deteriorate. Similarities to the FTX case can be seen in the recent civil charges brought by the US Securities and Exchange Commission against the biggest remaining crypto exchange: Binance. These civil charges allege that Binance’s CEO and Binance entities were involved in an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law. [26] Should these allegations be proven, this would be yet another example of the fundamental shortcomings of the crypto ecosystem. The recent crypto failures also show that risk, in itself, is technology-neutral. In financial services, it does not matter if a business ledger is kept on paper as it was for hundreds of years, in a centralised system as we have now or on a blockchain as in the crypto asset ecosystem. In the end, whether a firm remains in business or fails depends on how it manages credit risk, market risk, liquidity risk and leverage. Crypto enthusiasts would do well to remember that new technology does not make financial risk disappear. The financial risk either remains or transforms into a different type. It is like pressing a balloon on one side: it will change in shape until it pops on the other side. And if the balloon is full of hot air, it may rise for a while but will burst in the end.