Cryptocurrencies are often touted as the future of money, but after two of the leading virtual coins saw their values collapse in recent weeks, some investors could be forgiven that Bitcoin and its competitors are more like the history of boom and bust financial fads repeating.
Bitcoin, the cryptocurrency with the biggest market value, stood at $30,534 on the evening of May 19 but had plummeted to $28,772 less than 24 hours later. In roughly the same period, the second-largest virtual currency, Ethereum, had supporters pleased with a seven-day high of $2,095 only to see that tumble down past the $2,000 mark to a low of $1,916.
The difference of a few hundred or thousand dollars in the coins’ value might not seem like much to the casual observer, but for large investors it has wiped out potentially millions. And that’s got some market analysts wondering whether the crypto ship is starting to take on water.
Key factors behind the market chaos – which at one point this month slashed the value of the total cryptocurrency market by about $578 billion, or 30 percent – are U.S. economic moves including soaring inflation and a half-percent hike in interest rates by the Federal Reserve. The technological problems that plagued the virtual coin Terra and its “stablecoin” TerraUSD also spooked investors, leading to selloffs that helped to further drive the downward spiral.
Gary Gensler, chair of the U.S. Securities and Exchange Commission, warns that the problems might just be starting. He told House Appropriations Committee members at a recent hearing that, “I think a lot of these tokens will fail,” according to the Wall Street Journal’s reporting on his remarks. “I fear that in crypto . . . there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets,” he said.
For anyone considering making Bitcoins and other virtual currencies a core part of their retirement portfolio or other investment funds, Gensler’s words and the recent market upheaval could make them think not only is the crypto ship taking on water, but it’s also starting to sink.
Yet there are still signs for optimism, with virtual coin currency tracker CoinGecko showing that Bitcoin and Ethereum have recouped their mid-May losses and are back on the uptick.
And cryptocurrency advocates can also take relief in comments this month from Kristalina Georgieva, managing director of the International Monetary Fund, that some virtual coins – but not all of them – have genuine financial merit and qualify as valuable digital assets.
Cryptocurrency “offers us all faster service, much lower cost, and more inclusion. But only if we separate apples from oranges and bananas,” she told the World Economic Forum in Davos, according to press reports, although she did not single out individual brands for praise.
The world of investing can often be a gamble, even with the best-informed insight from experts, and virtual coins are no exception. Indeed, Georgieva warned as much in her remarks.
Amid the TerraUSD stablecoin problem, she said, “The less there is backing [a stablecoin], the more you should be prepared to take the risk of this thing blowing up in your face.”
That’s why having a solid financial plan is vital when thinking of investing in cryptocurrencies. Developing such a plan upfront helps people to understand how much they’re willing to spend, and the risk they’re open to taking, in the often unpredictable world of virtual coins.
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About Sweta Bhargav