One of the things that makes trading cryptocurrencies unique compared to other financial instruments, is that you are not just trading an asset in the conventional sense. Rather, what you are investing in is technology.

Indeed, cryptocurrencies are not just digital stores of wealth that can be used to make transactions, they are also an entire digital ecosystem that have an almost limitless number of potential uses.

Whilst this is arguably what makes cryptocurrencies so unique and interesting to invest in, it is also one of the major sources of the risk attached to investing in them. And it is perhaps for this reason that those with an interest in crypto tend to pay very close attention to the OKX Cryptocurrency prices on a daily basis.

Despite having a reputation for being a somewhat risky investment particularly when compared to other more traditional investments, such as equities, commodities, or bonds there are nevertheless some things you can do to manage your risk when investing in cryptocurrencies.

Whilst some of these are general risk management tips that you should always pay attention to and implement where possible, others are more specific to the cryptocurrency sector.

Cryptocurrency Risks

Before we explore some of the techniques, strategies, and considerations to manage your risk, we should first briefly set out what the sources of cryptocurrency risks are. There are various sources of risk associated with cryptocurrencies, although the following are arguably the most important to keep in mind:

Cryptocurrency Trading And Investing Risk Strategies

With these risks in mind, lets take a look at some of the risk management strategies you can adopt to help mitigate them:

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Risk Management And Cryptocurrency Investing: Is It Possible? - The Dubrovnik Times

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The amount of cryptocurrency flowing into privacy-enhancing mixer services has reached an all-time high this year as funds from wallets belonging to government-sanctioned groups and criminal activity almost doubled, researchers reported on Thursday.

Mixers, also known as tumblers, obfuscate cryptocurrency transactions by creating a disconnect between the funds a user deposits and the funds the user withdraws. To do this, mixers pool funds deposited by large numbers of users and randomly mix them. Each user can withdraw the entire amount deposited, minus a cut for the mixer, but because the coins come from this jumbled pool, it's harder for blockchain investigators to track precisely where the money went.

Some mixers provide additional obfuscation by allowing users to withdraw funds in differing amounts sent to different wallet addresses. Others try to conceal the mixing activity altogether by changing the fee on each transaction or varying the type of deposit address used.

Mixer use isn't automatically illegal or unethical. Given how easy it is to track the flow of Bitcoin and some other types of cryptocurrency, there are legitimate privacy reasons anyone might want to use one. But given the rampant use of cryptocurrency in online crime, mixers have evolved as a must-use tool for criminals who want to cash out without being caught by authorities.

"Mixers present a difficult question to regulators and members of the cryptocurrency community," researchers from cryptocurrency analysis firm Chainalysis wrote in a report that linked the surge to increased volumes deposited by sanctioned and criminal groups. "Virtually everyone would acknowledge that financial privacy is valuable, and that in a vacuum, there's no reason services like mixers shouldn't be able to provide it. However, the data shows that mixers currently pose a significant money laundering risk, with 25 percent of funds coming from illicit addresses, and that cybercriminals associated with hostile governments are taking advantage."

The report added: "Mixers may soon become obsolete as Chainalysis continues to refine the ability to demix certain mixing transactions and see users original source of funds. But for the time being, our data shows that mixers are receiving more cryptocurrency than ever in 2022."

Cryptocurrency received by these mixers fluctuates significantly from day to day, so researchers find it more useful to use longer-term measures. The 30-day moving average of funds received by mixers hit $51.8 million in mid-April, an all-time high, Chainalysis reported. The high-water mark represented almost double the incoming volumes at the same point last year. What's more, illicit wallet addresses accounted for 23 percent of funds sent to mixers this year, up from 12 percent in 2021.

As the graph below illustrates, the increases come most notably from higher volumes sent from addresses connected to illicit activity, such as ransomware attacks, cryptocurrency scams, and stolen funds carried out by groups sanctioned by the US government. To a lesser extent, volumes sent from centralized exchanges, DeFi, or decentralized finance protocols, also drove the surge.

Chainalysis

A breakdown of volumes connected to illicit sources shows that the spike is driven primarily by sanctioned entitiesmainly Russian and North Korean in originfollowed by cryptocurrency thieves and fraudsters pushing cryptocurrency investment scams.

Chainalysis

The sanctioned entities are led by Hydra, a Russia-based dark web market that serves as a haven for criminals to buy and sell services and products to one another. In April, the US Department of Treasury sanctioned Hydra to stymie the group's efforts to liquidate their ill-gotten proceeds. The remaining volume from sanctioned groups came from the North Korean hacking group Lazarus and the Blender.io tumbler, which the US Treasury Department sanctioned earlier this year for serving the North Korean government.

Chainalysis

Despite their utility, mixers suffer a critical Achilles' heel: Large transactions make them ineffective, meaning that they work less efficiently when people use them to deposit large amounts of cryptocurrency.

"Since users are receiving a 'mix' of funds contributed by others, if one user floods the mixer and contributes significantly more than others, much of what they end up with will be made up of the funds they originally put in, making it possible to trace the funds back to their original source," Thursday's report explained. "In other words, mixers function best when they have a large number of users, all of whom are mixing comparable amounts of cryptocurrency."

Post updated to correct description of Blender.io.

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Cryptocurrency flowing into mixers hits an all-time high. Wanna guess why? - Ars Technica

On July 5, 2022, cryptocurrency brokerage Voyager Digital filed for chapter 11 in the Southern District of New York Bankruptcy Court, citing a short-term run on the bank due to the crypto winter in the cryptocurrency industry generally and the default of a significant loan made to a third party as the reasons for its filing. At Voyagers first day hearing on July 8, 2022, the Bankruptcy Court asked the critical question of whether the crypto assets on Voyagers platform were property of the estate or its customers. Voyager asserted the crypto assets were assets of the estate pursuant to the terms of its customer agreements, but the question of ownership was more problematic in the context of a liquidation. In that context, Voyagers plan of reorganization proposes to resolve any mystery of ownership by delivering the reorganized company to its customers.

On July 13, 2022, cryptocurrency lender Celsius Network filed for chapter 11 in the Southern District of New York Bankruptcy Court. Celsius had frozen customer withdrawals on June 12, 2022 and, at the time of its chapter 11 filing, indicated that it would not be requesting court authority to allow customer withdrawals. Celsius noted in a press release that customer claims would be addressed through the chapter 11 process.

Voyagers and Celsius chapter 11 bankruptcy filings highlight the question of whether crypto assets held by an exchange, or similar platform, may be considered property of a bankruptcy estate and, therefore, not recoverable by the customer, who would then likely be an unsecured claimholder of the debtor.

While some commentators have suggested that crypto assets might be considered property of the exchanges bankruptcy estate, existing common law, existing provisions of Uniform Commercial Code (UCC) Article 8, and proposed amendments to the UCC recognize that if the arrangement and relationship between the exchange and its customers is one that is characterized as custodial, the crypto assets held by the exchange should remain property of the customer and, hence, not subject to dilution by general unsecured claimholders.

Custodial Assets in the Bankruptcy of the Custodian

The common law. When assets are held by a custodian for the benefit of the customers of the custodian, the assets are owned by the customer and would not form part of the debtors bankruptcy estate. The United States Court of Appeals for the Seventh Circuit determined in In re Joliet-Will County Community Action Agency[1] that property held by the debtor as a custodian or other intermediary who then generally lacks beneficial ownership rights is not an asset of the bankruptcy estate.

The court then looked to see if the relationship between the debtor and those who transferred funds to the debtor was in fact custodial. The court concluded the answer depends on the terms under which the grants were made and the relationship between the holder of the funds and its customer. In Joliet-Will, the agreement provided for controls on the holders use of the funds and the holder was in effect an agent to carry out specified tasks rather than a borrower, or an entrepreneur using invested funds. The court concluded the relationship was custodial and, thus, the funds were not property of the bankruptcy estate.

In the context of a cryptocurrency exchange bankruptcy, the same analysis should apply where the terms of the relationship between an exchange and its customer are comparable and, thus, custodial. In that case, the customer would have a basis to assert that it should remain the beneficial owner of the assets, rather than become a general unsecured claimholder of the exchange.

The commingling of customer assets, or the contractual right of an exchange in possession or control of the customers assets to grant a security interest in that property do not, of themselves, prevent the assets from remaining the property of the customer.[2]

Conversely, if the entity in possession or control of the property has extensive rights to use the property for its own benefit, a court is more likely to conclude that the relationship is not custodial. In that case, the customer would have a contractual claim for the return of the money [it] had paid, but he would not have a property right in the money.[3]

However, even if a court was to determine the customer should remain the beneficial owner of assets held by a custodian in such capacity, notwithstanding any commingling and any right to pledge the cryptocurrency, any contractual rights of the custodian (for example, any rights under a staking arrangement) should become property of the estate. In such a case, while the customer remains the beneficial owner of its cryptocurrency, which would not be subject to distribution to general unsecured claimholders in the exchanges bankruptcy, it could be tied up under the automatic stay preventing parties from exercising control over the exchanges contractual rights (e.g., under a staking arrangement, the automatic stay might prevent a customer from recalling the cryptocurrency to its account).

Article 8 of the Uniform Commercial Code. Article 8 mirrors these rules for financial assets held by a securities intermediary. Under Article 8, a securities intermediary[4] includes a custodian of a financial asset[5] who otherwise meets the definition of a securities intermediary.[6] Critically, existing language in Section 8-503(a) of the UCC outlines the ownership interest of a customer whose cryptocurrency is held by an intermediary such as an exchange, if the exchange is a securities intermediary, has agreed with the customer to treat the cryptocurrency as a financial asset,[7] and has credited the financial asset to a securities account.[8] This is true under Article 8 even though the securities intermediary holds the financial assets in fungible form (i.e., they are commingled).[9] Article 8 in effect codifies the common law custodian rules for transactions within the scope of Article 8the customer of the custodian retains its property interest and has a pro rata interest in the commingled assets held by the custodian.

Proposed Amendments to the Uniform Commercial Code. Pending amendments to the UCC further implement the rule that custodially held crypto assets should not be property of the bankruptcy estate in a bankruptcy of a custodian-cryptocurrency exchange. The drafting of amendments to the UCC specifically to address certain cryptocurrencies and other digital assets is nearing completion and is expected to go to the States for consideration in the Fall of 2022. Under these amendments, cryptocurrencies would fit into a new category of collateral under the UCC, referred to as controllable electronic records (a form of general intangible) (CERs), which would generally include information stored in a nontangible medium that can be subjected to control. Under these amendments, CERs will have many characteristics of negotiability similar to negotiable instruments and securities; however, cryptocurrencies ordinarily will not be considered money for purposes of the UCC (that is, the amendment generally provides that cryptocurrencies generally are not considered money, but a cryptocurrency created and adopted by a government as an authorized medium of exchange could be money under the UCC).

Notably, the proposed amendments to the official comments to Article 8 of the UCC primarily serve to make clear that a securities intermediary and a customer of a securities intermediary can agree to treat a cryptocurrency as a financial asset and credit it to a securities account with the treatment described above.

The proposed amendments to the official comments in Section 8-501(d) note that assets such as CERs might also be controlled by a securities intermediary outside of a securities account for the benefit of a customersimilar to traditional securities, in which case the bankruptcy of the intermediary often times would not put in doubt the customers ownership of securities in in that circumstance held by the intermediary:

[A]ssets such as controllable electronic records, controllable accounts, and controllable payment intangibles also might be associated with an intermediary as well as with its customer under a similar direct holding arrangement. . . . As with conventional certificated securities, whether an intermediary has created a security entitlement in favor of an entitlement holder or is holding a financial asset directly for a customer depends on the nature of the relationship and the nature of the rights of the intermediary and the customer with respect to the financial asset.

In addition, revisions to Article 9 of the UCC will provide that a security interest in a CER can be perfected the old fashioned wayby filing a financing statementor by obtaining control of the CER. Under current distributed ledger technology structures such as blockchain, a secured party normally would normally obtain control of a cryptocurrency that is a CER if the secured party has the private key. A secured party can have control through a custodian that has control for the benefit of a secured party. Where a securities intermediary and a customer of a securities intermediary agree to treat a cryptocurrency as a financial asset[10] and credit it to a securities account, the customer would have security entitlement related to the cryptocurrency, and the secured party could obtain and perfect a security interest in such security entitlement under existing procedures under Articles 8 and 9 of the UCC.

A new Article 12 to the UCC is being proposed that includes provisions addressing transactions in cryptocurrencies falling under the category of a CER, such as sales of the cryptocurrency. In these transactions, a buyer of a CER can take free of the property claims of others if the buyer obtains control of the CER (e.g., holding the private key), gives value, and does not have notice of the property claims of others.

While the proposed amendments to the UCC have yet to be finalized and adopted by the States, many of the amendments to the UCC as they relate to the ownership interest of a cryptocurrency exchange customer in custodially held cryptocurrency are proposed as amendments to the official comments, without revision to the operative statutory provisions themselves because the existing statutory provisions already provide for the described results. Thus, a bankruptcy court could rely on the existing state UCC statute as a basis to determine that when cryptocurrency is held as a financial asset credited to customer accounts, the cryptocurrency is property of the customer, rather than bankruptcy estate. This is the same result outside of Article 8 as discussed above.

Conclusion

Crypto assets held custodially by an exchange or other entity for a customer should be treated as the property of the customer. The analysis of when a custodial relationship exists will depend on the agreements and other facts in a particular relationship.

_______________

[1] See In re Joliet-Will Cnty. Community Action Agency, 847 F.2d 430, 431 (7th Cir. 1988) (Posner, J) (Did they constitute JolietWill a trustee, custodian, or other intermediary, who lacks beneficial title and is merely an agent for the disbursal of funds belonging to another? If so, the funds (and the personal property bought with them, cf. In re Kaiser, 791 F.2d 73, 77 (7th Cir.1986)) were not assets of the bankrupt estate. (Emphasis added)).

[2] See also Restatement (Third) of Restitution and Unjust Enrichment 59 (property interest in asset continues in commingled assets when the interests can be traced). See also Illustration 26 (400 customers of smelter deliver silver to smelter, who keeps records of the amount of silver delivered by each customer, refines the silver for a fee, and agrees to return a corresponding amount of silver to each customer; when smelter fails, each customer has a pro rata property interest in the refined silver, which is not the property of smelter); UCC 9-207(c)(3).

[3] Joliet-Will, 847 F.2d at 432.

[4] Securities intermediary is defined in Section 8-102(a)(14) of the UCC.

[5] Financial asset is defined in Section 8-102(a)(9) of the UCC.

[6] UCC 8-102(a)(14) and Comment 14.

[7] See Section 8-102(a)(9)(iii) of the UCC.

[8] Section 8-503(a) provides that [t]o the extent necessary for a securities intermediary to satisfy all security entitlements with respect to a particular financial asset, all interests in that financial asset held by the securities intermediary are held by the securities intermediary for the entitlement holders, are not property of the securities intermediary, and are not subject to claims of creditors of the securities intermediary, except as otherwise provided in Section 8-511.

[9] This rule is the same as the smelting example described above from the Restatement (Third) of Restitution and Unjust Enrichment.

[10] A financial asset does not have to be a security (as defined in Article 8 of the UCC) to be a financial asset. As long as the relationship between the securities intermediary and the customer creates a securities account (UCC 8-501, Comment 1), the securities intermediary and its customer (referred to as an entitlement holder) can agree to have any asset treated as a financial asset. UCC 8-102(a)(9)(iii).

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The Other Side of The Coin: Cryptocurrency Assets in Bankruptcy - JD Supra

*This content is brought to you byJaltech

By Jonty Sacks*

The old adage, its not about timing the market, but about time in the market, has been proven true over the years. Having said that, one cant ignore the buying opportunities across the markets. For instance, Uber, Tesla, Alphabet, PayPal, Airbnb, Meta, and Netflix are all down between 25% to 70% over the past 6 months. In fact, in my lifetime, the S&P 500s performance over the past 6 months has never been worse. But as you move up the risk spectrum, the performance numbers are even more eye-watering.

The cryptocurrency market has experienced a huge sell-off, below will give you a sense of the performance of nine of the premier cryptocurrencies:

Whats evident is that there has been a large sell-off on cryptocurrencies across the market, so much so that since its inception the Jaltech Cryptocurrency Basket is down 68% (note that the basket was up 60% in November). What most investors are asking themselves is whether the cryptocurrency market can recover. As evident from the below graph, seasoned investors will tell you that they have seen sell-offs like this before with significant rebounds.

The question that investors should be asking is are cryptocurrencies undervalued at the moment?

To answer this question, I would argue that what is not evident from the price drop is the adoption rate of cryptocurrencies by investors and market participants who are using blockchain and cryptocurrencies (this will be my next opinion piece). Take the Ethereum blockchain network, Token Terminal reported that the Ethereum network generated R48 billion (R260+ million per day) in revenue over the past 180 days while Ychart is reporting that the network is exceeding 1 million transactions per day. Opensea, one of the largest NFT marketplaces, generated revenue in excess of R25 billion over the past 180 days and the list goes on.

For information about Jaltechs Cryptocurrency Basket,click here.

Investors should be focusing on the network effects and adoption rates in the cryptocurrency ecosystem rather than on price movements while having the goal of capturing that growth over the long term via investment returns.

The key to investing in this market is to realise that the adoption of blockchain technologies is the fastest adoption of any technology in human history and price action does not always reflect this. Prices may be down, but adoption rates continue to climb as the above revenue and transaction numbers highlight. In this phase of the cryptocurrency market, I believe a prudent investment mindset is to focus on adoption rather than price.

This theory is supported by the below chart, illustrating that despite the well-known massive price fluctuations since Bitcoins inception, the number of wallets on the Bitcoin block explorer Blockchain.com wallet has steadily increased over time pointing to steady adoption despite movements in price.

What many naive people dont realise is that the cryptocurrency/blockchain ecosystem is expanding at a huge rate, the question is, is todays price cheap or not.

Jonty Sacks Partner at Jaltech

Jaltech offers investors exposure to a basket of cryptocurrencies which is selected and managed by a team of cryptocurrency experts.

For information about Jaltechs Cryptocurrency Basket,click here.

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