After reaching unprecedented highs towards the end of 2021, the crypto market has been just as volatile on its way back down. Some of the largest cryptocurrencies — including Bitcoin, Ethereum and Solana — have lost over 60 per cent of their value in the last six months.
There are a number of factors which have contributed to this trend — some isolated to the crypto market alone, and others impacting a whole range of asset classes. The former includes the crash of LUNA and the de-pegging of the UST stablecoin.
“A few months ago, $LUNA was recognised as one of the most promising projects in the crypto space, with $UST being the third-largest stablecoin in market capitalisation,” says Rudy Lim, CEO of OIO Singapore.
“The death spiral of $LUNA displayed the inefficiencies of the project and this caused it to lose almost all of its value in around a week. This incident has and will prompt tighter regulations in the stablecoin markets and crypto as a whole.”
For one, the European Union is considering a mandate where any issued stablecoins must be backed by an equivalent amount of fiat currency holdings.
“Regulation bodies worldwide are actively conducting their due processes to make the space more secure,” he adds.
This crash has been an eye-opener, especially for new crypto investors who were lured in by the highs of the 2021 bull run. As such, Lim advises them to “re-adjust their expectations of the market and re-evaluate their investment strategies.”
Along with the LUNA/UST crash, the crypto market has been impacted by real-world events.
“Factors such as a 40-year-high inflation rate, an overall unstable geopolitical situation, global sanctions on trade and commerce, and after-effects of COVID-19 have contributed to this period of downturn,” says Lim.
Will the crypto markets recover?
Lim believes that although it may take some time, the crypto markets are bound to bounce back.
“Assets with intrinsic value and great teams will continue to build through a bear market. Confidence in the market will need some time to restore, but be assured that it will return,” he says.
Once it does, the crypto ecosystem will likely have a new and improved form too. Developers will be able to take this time to reflect on the issues which have been highlighted through events such as the LUNA/UST crash.
“Future developments will take into account the inefficiencies of platforms, protocols and products from this downturn and improve upon them.”
From an investor’s point of view, there might be a more careful approach to the crypto market.
“Investments based on speculation and hype without a proper understanding of the underlying instrument have caused many retail and amateur investors to suffer losses and even lose a great deal of their savings.”
Crypto adoption might suffer as a result. However, those who invest going forward are likely to have a better understanding of the technology and projects which they’re buying into.
“Retail investors who follow hype without sufficient knowledge about blockchain technology and cryptocurrency may be deterred by a crash such as the current one,” says Lim.
“But those with access to knowledge based on true fundamentals and values may take a more balanced view of the incident. They may even take advantage of the discounts at which assets are trading now to accumulate for the future.”
What risks accompany crypto investments?
For those looking at buying opportunities right now, the question of risk is sure to be a big one.
Unlike equity instruments, crypto assets are freely available and don’t face the same level of scrutiny while being listed. This leaves the burden of research entirely on the investor.
Being aware of price volatility is one thing, but it’s also important to know about the various places it can stem from, while judging a crypto asset.
For starters, scams and rug pulls are a growing issue in the space.
“The pseudo-anonymous nature of the space makes it challenging to punish acts of bad faith,” says Lim. “Risks stemming from technology, such as coding loopholes or design flaws, are also present.”
That being said, taking on these risks does come with plenty of incentive.
“Crypto investments offer returns that are unseen in the traditional financial markets. As the adage goes, ‘high risk, high return’.”
Is crypto suitable for retail investors?
The allure of high rewards has seen many dive headfirst into crypto, with a strategy that resembles gambling more than investing.
As a result, many around the world have lost their life savings to the market crash. This brings to question whether crypto is a suitable asset class for retail investors.
It’s more apparent than ever that there is significant research needed before investing in crypto. This holds true even for stablecoins, which betray the notion of being relatively safe investments.
Investors need to understand that determining and separating actual value from hype and speculation comes with a deep understanding of the markets based on research and conviction. Having said that, education and guidance are critical to making sound investment decisions, especially in a market as volatile as crypto.
– Rudy Lim, CEO of OIO Singapore
Lim believes that investors should consult subject matter experts to help navigate the crypto world and find the right products that match their risk profile. “Investors should also purchase assets from entities regulated by the MAS,” he adds.
Featured Image Credit: OIO Singapore
