What to do if you own crypto right now
The cryptocurrency markets have endured a torrid week. What should you do as an investor?
If you've invested in cryptocurrency and have felt a sense of panic this week, you're not alone. Investing in highly volatile assets such as cryptocurrencies can be an extremely stressful experience and it's natural to be worried when prices crash.
But why has this happened and what should you do as an investor when the market takes a dive?
One of the largest stablecoins, TerraUSD (UST), collapsed in shocking fashion this week, triggering a huge crash across the entire cryptocurrency market. More than US$1 trillion has been shaved off the total market capitalisation of the cryptocurrency sector. Bitcoin itself dropped from around US$40,000 at the start of May to less than US$29,000.
UST is what is called an "algorithmic" stablecoin. It is meant to maintain a value of US$1 at all times, which is referred to as a peg. Unlike most stablecoins, which are typically backed by an equivalent amount of cash and cash-like assets to maintain their peg, UST is backed by a basket of other cryptocurrencies.
The main cryptocurrency that supports the value of UST is LUNA. The idea is that you will always be able to redeem 1 UST for US$1 worth of LUNA.
"If this sounds like a bad idea, that's because it is," Finder's cryptocurrency editor James Edwards said. "LUNA and UST have long been criticised as being unsustainable, with the primary concern being that a major market crash would cause the whole thing to fall apart, which it did.
"People are calling this a death spiral, as once both their values drop beyond a certain threshold, they continue to fall towards zero."
After reaching an all-time high of US$119, LUNA is currently sitting below 1 cent. UST, which is designed to maintain a value of US$1, has dropped to around 20 cents [at the time of writing].
"There will be a huge amount of instability for quite a while. It will take weeks, even months to course correct, but big things like this have happened before. The cryptocurrency market will come back." - Fred Schebesta
What should you do?
The first thing to do is to take stock of your situation. How much have you invested? How big is your exposure? Is your ability to pay for day-to-day expenses impacted by this situation, or was your crypto investment a longer-term strategy to create wealth?
While you are under stress and assessing the situation, you may be extremely tempted to sell your cryptocurrency before things potentially get even worse. This means you would crystallise your losses after prices have crashed, which is not generally recommended.
The other option is to hold your position right now, in the hope that prices will recover.
"If you are already in the crypto game and are worried, one way to approach it is to view it as a long-term investment – you want to sell when it's high, not low," said cryptocurrency expert Tegan Jones.
"Experienced investors in any market tend to avoid panic selling when things are bearish. There have been big drops and corrections in the crypto market before.
"It's also worth keeping in mind that it is not just crypto that's impacted at the moment. Tech stocks are also plummeting and the S&P 500, Dow Jones and NASDAQ were all down dramatically this week. In fact, the S&P 500 was down 16% from the start of the year when the markets closed on Monday US time. So with more traditional stocks dropping, it makes sense that crypto – which is often seen as a less 'safe' investment – would fall even further.
"There's always risk when it comes to investments, especially cryptocurrency... ideally, you don't want to risk more than you can afford to lose."
If you are in a position where you have invested a lot of money in crypto and you're not sure what to do, or you need urgent help with your money, contact the National Debt Hotline or head to MoneySmart.
Finder co-founder and cryptocurrency investor Fred Schebesta added, "Cryptocurrency is one of the most volatile, if not the most volatile asset classes of our time. There are big losses and big gains and this comes with high risk and potential for huge opportunity. As the market matures and regulation comes in, we will see more stablisation and less volatility with more adoption."
Following the UST crash, Schebesta said there has been "a massive loss of confidence" amongst cryptocurrency investors.
"There will be a huge amount of instability for quite a while. It will take weeks, even months to course correct, but big things like this have happened before. The cryptocurrency market will come back."