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

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Investors in for 'double whammy' as debt-funded crypto assets crash
The wipeout of TerraUSD and sister token Luna knocked $270bn off the crypto sector’s total value (Angel Garcia/Bloomberg)

Myron Jobson, senior personal finance analyst at the D2C platform business, said the recent sell-off of crypto assets was tough for those who invested in the asset class for the first time, particularly those who took out loans or used credit cards to fund their investments.

Its poll of 1,000 UK adults aged 18-29 in June last year found 45 per cent had made crypto their first investment of choice. Half of the 20 per cent who invested in the cryptocurrency Bitcoin had turned to debt to fund it.

The value of Bitcoin is down 21 per cent over the past month, though it has recovered slightly in the past five days. It is currently worth close to £24,500, having crashed from £32,000 a month ago and a high of £50,000 last November.

Etherium, second only to Bitcoin in terms of market cap, has plunged from more than $3,100 (£2,480) in April to about $2,000 now. It too has recovered from a low of below $1,800 over the past week.

While volatility is part of the growing pains of the relatively new crypto market, the tumult in price action has left investors whipsawed.Myron Jobson, senior personal finance analyst at Interactive Investor

Jobson said: “The crypto sell off has been driven by a culmination of long and short term factors including worries about regulation, security breaches as well as pressures buffeting traditional markets such as geopolitical uncertainty and US interest rate hikes.

“Whatever the reason, the crash is a tough pill to swallow for those who made their very first investment in cryptos.

"Our research found that 45 per cent of young adults aged between 18 and 29 have made crypto their first investment of choice, with an alarming number funding this through a cocktail of credit cards, student loans, and other loans.

"The worry is many have been hit with a double whammy of investment loss and a deeper plunge into debt. The debt issue is made worse with rising interest rates."

The UK base rate has risen to 1 per cent in consecutive decisions over recent months as the Bank of England tries to tame inflation, which has surged ahead of its 2 per cent target each month since May last year. It hit 7 per cent in March, a 30-year high.

No inflation hedge

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said "fears about rampant inflation and the abrupt ending of the era of cheap money have sent cryptocurrencies careering down a cliff edge, as investors scuttle away from risky assets."

She said the losses amid rising prices showed that Bitcoin was no inflation hedge and inherently risky in nature.

"We’ve had warnings time and time again from the financial watchdog, the FCA that investors risk losing all their money if they invest in the crypto wild west and the red flags it’s been waving have been shown to be prescient given the downwards rollercoaster ride crypto is currently on."

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.

We’ve had warnings time and time again from the FCA that investors risk losing all their money if they invest in the crypto wild west.Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown

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.

carmen.reichman@ft.com