Small players lose faith in crypto after liquidation

Isah, a recently unemployed administrative assistant, vowed never to invest in crypto again.

“I can’t believe I fell into crypto,” she told Reuters by phone. “I’m just trying not to get depressed. Crypto took my money, fine. It shouldn’t take my head.”

The crypto market, infamous for its wild price swings, collapsed last week as investors withdrew their money from riskier assets amid concerns about rising inflation and rising prices.

Bitcoin, the world’s largest cryptocurrency, fell to $25,401 on Thursday, its lowest level since December 2020. It hit a record high of $69,000 in November.

Smaller tokens were also hit, with Ether, the second-largest token, falling more than 15% to its lowest level since June. Luna – a digital currency widely publicized on social media and backed by institutional crypto investors – has lost almost all of its value.

Small traders like Isah have flocked to cryptocurrencies in hopes of quick returns, despite warnings from regulators that these emerging assets could pose high risk.

Platforms like Robinhood, which has 23 million customers in various assets, have helped to boost retail investment, including in cryptocurrencies. About a quarter of Robinhood’s transaction-based revenues came from cryptocurrencies in the first quarter of this year, Robinhood said in its latest earnings statement.

The total number of cryptocurrency platform users has exploded. Binance, the world’s largest cryptocurrency exchange, had some 118 million customers last month, up from 43.4 million in the first quarter of last year.

But after last week’s turmoil, online forums were awash with ominous stories, with retail investors voicing fear over their losses.

“I’m 49, big mortgage, 3 kids, etc. My retirement party is on ice for the foreseeable future!” one user with the handle Boring-Fun-3646 posted on Reddit.

Another user with handle AdventurousAdagio830 posted on Reddit, “it doesn’t really seem like I lost $180,000.”

DEATH SPIRAL

Symbolic of cryptocurrency risks was the collapse last week of terraUSD, a stablecoin designed to maintain constant value through a complex algorithm involving luna.

When the coins came under heavy selling pressure, the system collapsed. TerraUSD — designed to hold $1 — traded around 9 cents on Tuesday, while Luna plunged close to zero, according to data from CoinGecko.

Tejan Shrivastava, a 31-year-old graphic designer from Mumbai who has been investing in cryptocurrencies since last year, saw his $250 investment wiped out by the collapse of Luna.

“He was trapped in a death spiral. All the money ran out within 15 minutes,” he told Reuters.

“I don’t even know if I will invest in crypto in the future. I have a crypto portfolio, but I plan to liquidate it once it breaks even.”

Luna’s fall wiped out most of its market value, which was more than $40 billion in early April, according to CoinGecko data.

The frustration of online investors has even spilled over into the real world.

Last week, Soul Police said they were looking for a suspect after an unidentified person rang the doorbell of terraUSD founder Do Kwon’s apartment and fled the scene.

Police would investigate whether the suspect had invested in cryptocurrency, a Soul police officer told Reuters.

AN UNEVEN REGULATION

In its 13-year history, the cryptocurrency industry has been marred by dizzying ups and sudden free falls. In November, for example, bitcoin crashed by a fifth in just under two weeks after hitting an all-time high of $69,000. Six months earlier, it had fallen by almost 40% in just nine days.

Still, the latest cryptocurrency crash — which pushed the sector’s combined value to $1.2 trillion, less than half of what it was last November — led to the luna crash, which was the eighth cryptocurrency on May 1 according to Market capitalization.

Cryptocurrencies are unevenly regulated around the world, with traders of bitcoin and its arsenal of smaller tokens generally not protected from price crashes.

But it is difficult to gauge the extent of retail investors’ pain from the cryptocurrency plunge and its impact on future appetites, given the opaque nature of the market.

In Britain, more than 4% of adults — or about 2.3 million people — own cryptocurrencies, according to data released last year by Britain’s financial watchdog.

The British watchdog said understanding of cryptocurrencies was lower than last year, “suggesting that some cryptocurrency users may not fully understand what they are buying.”

Still, some small investors remain confident.

Eloisa Marchesoni, who is based near Tulum in Mexico and who invests with a cryptosyndicate, said she will not give up.

“I’m looking for the bottom – we’re all waiting for bitcoin to drop $22,000, which isn’t too likely, but not ‘not at all likely’.”

Marchesoni also hedges his crypto bets with physical assets – “cars because you can rent them, watches, real estate.”

Bitcoin hovered around $30,000 on Tuesday, having lost more than 20% since the start of the month.

Supervisors remain alert. The UK government said last month it would regulate stablecoins.

The US Securities and Exchange Commission is tightening its position. SEC Chairman Gary Gensler said this week that cryptocurrency investors need more protection.

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