In Focus: Megatrends  

Investors in for 'double whammy' as debt-funded crypto assets crash

The collapse of the Terra ecosystem, and the tokens Luna and UST, will go down as one of the most painful and devastating chapters in crypto history. (Gabby Jones/Bloomberg)

It is hard to predict whether the crypto sell off is indicative of a long-term decline, as the assets have had their ups and downs before, amid in different market environments.

Richard Smith, founder and CEO of risk analytics platform RiskSmith, said all crypto assets were affected by the latest downturn, as "all growth stories will be put on the back burner while value and safety come to the fore".

But he said a few of them were likely to recover: "It is a long-term decline for the vast majority of crypto ventures. Most cryptos are valued on nothing but memes. This is the analog of the dot-com bust for crypto. Most of them will end up on the ash heap of history [but] a few will rise from the ashes."

He suggested investors who were able to hold the assets for at least a couple of years, and were content with them falling by another third to half of what they've fallen already, could think about buying the dip. 

"If you’re hoping to pick the bottom and double your money in three to six months, you will most likely be disappointed. Remember that you don’t have to 'buy' everything at once. You can dollar cost average into a full position over the next three to six months."

He also pointed out that Bitcoin had risen 30 times over the past five years, which meant it was still up several multiples on what it was then.

Jobson said: “The Bitcoin, and the broader cryptocurrency story, is far from over, but the sell off reflects the high risk and volatile nature of cryptos.

"While volatility is part of the growing pains of the relatively new crypto market, the tumult in price action has left investors whipsawed."

Streeter said the most recent downward spiral in prices seemed to have been sparked by the dramatic fall in value of the TerraUSD stablecoin, which over the past seven days plunged from about $1 to $0.11 on May 16, taking with it the tokens Luna and UST.

The UK government too wants to recognise the use of stablecoins as a legitimate form of payment.

It said in the Queen’s speech it saw opportunities within crypto and blockchain for innovation, and that it’s intent on the safe adoption of cryptocurrencies.

"Just how that will be achieved is far from clear, but with crypto fans losing billions in this latest sell off, clamour is likely to intensify for a fresh set to rules, particularly for stablecoins, to be drawn up," said Streeter.