Written by: Susannah Streeter | Hargreaves Lansdown
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. Crypto fans, lulled into a false sense of security amid sharp price rises during the pandemic, are now facing a rude awakening with assets plunging across the board with Ether down by just under 20% since yesterday, despite notching up a slightly recovery in the last few hours. Bitcoin has crawled back up from its low of $26,000 reached early today, and is currently trading a nudge above $28,000 but it’s down 20% over the last five days.
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. This most recent price spiral downwards appears to have been sparked by the dramatic fall in value of the TerraUSD stablecoin, designed to trade one on one against the dollar-snapping off its peg, whipped by winds of panic rushing through the crypto world.
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 FCA reserved its most recent warning this week for NFTs, tokens that have been snapped up by speculators on a wave of euphoria, which are now crashing back down to earth. It’s a timely reminder that investors who dabble in such risky assets have very little protection, as they are not regulated beyond anti-money laundering legislation. There have been examples of hackers gaining access to keys to digital wallets and those taking the plunge have very little recourse to action should anything go wrong.
This latest plunge in the wheel of fortune demonstrates that speculating in cryptocurrencies is extremely high risk and are not suitable for the vast majority of people. Cryptocurrency values are driven entirely by the speculation that in the future they will have a meaningful role in the financial system. This makes it impossible to attribute a sound valuation to, or to make a call on, their current or future price. Their use as a means of exchange is very limited, and until they’re widely accepted, the price will continue to be driven by purely by speculation and right now with confidence plummeting, the use case seems even shakier. 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
There is now likely to be an even greater determination to bring crypto further within the regulatory sphere, given the shock plunge this week in values, to reduce knock on effects to the financial system. The UK government used the Queen’s speech to demonstrate it sees opportunities within the crypto and blockchain eco-system for innovation, but that it’s intent on the safe adoption of crypto currencies. 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.