It has been a calamitous week for cryptocurrency investors, who have endured huge price falls across most of the major coins.
Indeed, crypto fans who were lulled into a false sense of security over the past few years when prices were on the up during the pandemic are now facing a rude awakening with assets plunging across the board.
Bitcoin, for example, lost 11% of its value this week, dropping from £27,769 to £24,701, although its tough ride is far from an aberration. Since the crypto asset peaked on 9 November last year at £49,939, it has steadily been in decline.
It was not the biggest fall of the week, however. Those unfortunate enough to have put their cash into something called Terra Luna – another crypto that, I must admit, had completely passed me by – could only watch as its value plummeted 98% overnight.
One person on Twitter lamented that they had been convinced to buy the crypto by their friend having sold their car, posting a picture of their investment now worth $1.67 – although one should always be sceptical on what they read on social media.
Hargreaves Lansdown senior investment and markets analyst Susannah Streeter said this week that our old friend inflation was the main reason for the decline.
It seems, like a bad rash, inflation spreads into every corner of the market. The logic here is that higher bond yields (through higher interest rates) make owning risky assets less appealing.
The more you can earn from safer options, the less likely you are to dump your cash into a pot-luck crypto asset.
“Hopes that Bitcoin would act as an inflation hedge have fast evaporated as the cryptocurrency has lost more than half its value since its November high, as consumer prices have soared,” she said.
Myron Jobson, senior personal finance analyst at interactive investor, said the firm’s research found that 45% 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 loan and other borrowings.
I think we can all agree that the only cocktail young students should be wasting their money on is the ones they drink – responsibly of course.
One ‘I told you so’ can come from the Financial Conduct Authority. The City watchdog has repeatedly warned investors of the dangers of putting cash into these high-risk assets.
As a sidenote, it also warned this week about non-fungible tokens (NFTs), which have been snapped up by speculators riding the crypto/fad wave but are now crashing back down to earth.
The concern with things like cryptos and NFTs is that it is impossible to attribute a sound valuation to them. While fanatics argue that they can be used as a means of exchange, this is very limited.
“There may be speculators waiting in the wings to buy what they may see as just a big temporary dip but expect the volatility to continue as liquidity washing around financial markets evaporates as interest rates are hiked further,” Streeter argued.
No matter your view, putting all of your life savings into something like Bitcoin is unlikely to make you rich, no matter how tempting it might be: the risks are just too high and episodes like this will happen.
As Jobson said: “Whatever your approach to risk, cryptos should only be a small proportion of a well-diversified portfolio.” This might not be the get rich quick scheme many hope for, but neither will it leave you in the lurch.