FRM Part II · FRM Exam Part II · Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets
A portfolio manager notes that the price of an unbacked crypto asset fell 30% in a week with no change in any cash flow or news about a specific issuer. Which feature of unbacked crypto assets best explains why valuation is difficult to anchor?
Unbacked crypto assets produce no cash flows and are not claims on any issuer, so there is no fundamental value to anchor their price. Prices are driven by sentiment, leverage and flows, which explains sharp moves without news. Par redemption and reserves apply to stablecoins, not unbacked assets.
- AThey pay a contractual coupon that is repriced weekly
- BThey generate no cash flows and have no issuer, so there is no fundamental value to anchor priceCorrect
- CThey are always fully collateralized by fiat reserves that fluctuate
- DThey are guaranteed redeemable at par by a central counterparty
Explanation
Unbacked assets produce no cash flows and are not a claim on any issuer, so standard discounted cash flow or credit-based valuation does not apply. Prices are driven by sentiment, leverage and flows, which explains large swings. Redemption at par and collateral reserves describe stablecoins, not unbacked assets.
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