Cryptocurrencies, or digital assets, have gone through a lot of turmoil so far in 2022. Since their high-water mark in late 2021, major assets like Bitcoin and Ethereum have seen dramatic pullbacks in prices. These pullbacks created a chain reaction in other areas of the digital asset market, which ultimately led to the bankruptcy of several crypto platforms – and a crash that wiped out the value of a few large cryptocurrencies.
Many coins have seen massive price drops since their all-time highs and have not recovered. As an investor, how should you approach crypto now?
Crypto basics & recent tumbles
First, a brief synopsis of crypto and recent major events:
The blockchain technology used to trade cryptocurrencies has been hailed as a game-changer for the future of currency. Users can “confirm transactions without a need for a central clearing authority,” which democratizes access to the economy, especially for those who have historically not had access to financial institutions. Cryptocurrencies like Bitcoin, Ethereum and other coins or tokens are simply an alternative form of payment known as digital currencies. While potential drives crypto’s allure, so does speculation. And even though crypto has been lauded as “inflation-proof,” its recent tumbles affect their market value rapidly.
One of the major events that occurred recently was the dramatic collapse in value of TerraUSD, an algorithmic stablecoin, which was meant to behave like cash. TerraUSD’s algorithm was structured to keep it pegged tightly to the U.S. dollar, but the peg failed, prompting panic selling and simultaneously crashing another popular token, LUNA, which was linked to TerraUSD. Both tokens have lost tens of billions of dollars in total market capitalization.
Another major event that rocked the digital asset world was the collapse of Three Arrows Capital (3AC), a cryptocurrency hedge fund. This had a knock-on effect as other crypto trading platforms that were counterparties to 3AC had to freeze withdrawals for their clients.
Fundamental value propositions vs. ‘pump and dump’
I don’t say all of this to scare you out of investing in cryptocurrency. But I believe the prudent approach to this asset class is to focus on the fundamental value proposition of a digital asset – along with fully understanding its utility – before investing in it.
There are plenty of websites that promote new and upcoming coins based on recent spikes in performance; rosy claims about these coins’ long-term potential are inevitable. Much of this is self-serving, as seed investors in digital assets will try to promote their projects to keep prices going up, which in turn allows them to promote additional price appreciation and momentum in the coin.
Just like we have seen …….