Navigating Crypto Risks

I started this article on 11 May as a quick follow up to my last post on cryptocurrencies and NFTs, since they have been taking a bit of a beating since I posted it.

Then I wake up this morning and there has been an almighty burst in the bubble.

Overnight, cryptocurrency Terra Luna has fallen by 98%. Currently trading between $0.01 – 0.02. It started the week at around £84, it reached its all-time high of $119 as recently as mid-April…that’s a 99.97% total fall and surely is on its way to zero.

That’s an almighty rise and fall from its launch in April 2019.

The technology behind Terra Luna is very different from other more established currencies and it was this technology that was expected to be taking crypto to the next level. The technology it appears, is lacking.

Other cryptocurrencies have fallen as you would expect. After all, most banks dutifully plunged in value when Lehman’s went bust.

Since the recent highs mid-April, all of the top 3 currencies by market cap are way down. Bitcoin ~41%, Ethereum ~46% and Ripple over ~53%.

Of course, all banks collapsed with Lehman’s as they were complicit and very much part of the Global Financial Crisis problem. So the question here is, “does Terra Luna represent an isolated incident?”, much like Nick Leeson was for Barings, or is the whole system rigged.

Only time will tell.

For most, the best way to navigate these risks will be simply to ignore it all. For those that are keen to explore more, back to the original article.

Cryptocurrency, despite initially being tipped to replace their traditional fiat counterparts, have primarily contributed to investors pockets since their inception.

In recent years, currencies like Bitcoin and Ethereum have risen to dominate the market, each worth tens of thousands of dollars (albeit getting less by the day!), piquing people's interests as a new angle of the economy opens up. While prices of established currencies have put people of the growing market, a host of new coins exist that allow new investors to test the water.

The first thing to consider with cryptocurrencies is that, whether cheap or expensive, they are inherently extremely risky investments. They can fluctuate wildly and are easily manipulated by those with a monopoly over the market known as "whales" (there are rumours that these creatures were almost wholly responsible for the Terra Luna crash).

*A whale is a cryptocurrency term that refers to individuals or entities that hold large amounts of a currency. Whales hold enough cryptocurrency that they have the potential to manipulate currency valuations.

Cryptocurrencies are also poorly regulated, leaving people uniquely open to scammers with little recourse. The rapid rise of cryptocurrency has resulted in large communities dedicated to them.

New investors should consider contacting or joining groups those that discuss the process as a whole or specific currencies. They can offer guidance on the market and a group of people with which they can trade.

Every legitimate cryptocurrency should also have an easy-to-find white paper that explains the aim behind the project that founded it. These should contain an exhaustive list of details about what the project leaders hope to achieve, how long in which they hope to do it, and a general overview. Hard-to-find or absent white papers are a red flag for investors, as they are ultimately left without vital information.

Armed with a community and the information needed to trade, cryptocurrency investors need a platform where they can spend their money. This part of the process can be daunting, as crypto enthusiasts have established a range of platforms, each of which may have a different speciality.

Coinbase is among the best for beginners, with others such as Kraken and Crypto.com geared towards experienced traders and those on the go.

It may, however, be beyond many people’s patience. Out of curiosity, I tried to set up a crypto account. I had to give everything but my inside leg measurement (short!), failed to deposit with at least 3 cards (banks don’t like these platforms unsurprisingly) before finally managing it via direct transfer, only to have to go through varying degrees of scam and fraud warnings.

I also need a crypto wallet apparently, didn’t have one and don’t know where to get one.

I gave up!