Why Stable Cryptocurrencies Aren’t As Stable As Some Investors Think

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For the most part, I’ve quit riding the scariest roller coasters.

I loved the euphoria of the climb and the high emotional level of the screams as the ride plunged into the corners at blistering speeds. But then I started having headaches from the tension of anticipating the steep drops that tormented my stomach. The dizzy feeling I get after tripping isn’t fun anymore.

This is how I feel about investing in cryptocurrency. As exciting as this new technology is, it’s not worth the jerky, unpredictable movements.

Some people thought they had found a way to ride the cryptocurrency roller coaster and minimize wild declines by investing in stablecoins. The concept behind stablecoins is that they are meant to hold a certain value. They are presented as less risky compared to the volatility of investing in other cryptos, such as bitcoin or ethereum.

The voices of crypto-skeptics are getting louder

This promise of stability was not fulfilled when terra, also known as UST, imploded. It was designed to maintain its value of $1. This was not the case. Not by far.

Even the world’s most popular stablecoin, tether, fell below its $1 price in May. Online, you can find posts on Reddit and Twitter from people who are distraught and surprised by their dramatic losses after betting big on terra.

“It is very important to be psychologically prepared” for “loss, otherwise mental issues make it even worse,” wrote one Reddit user.

I like to use moments like this as a teaching moment. Before you put your money in stablecoin, you need to ask yourself a lot of questions, because it’s not a trick for the financially sensitive.

Here’s how to tell if you have the stomach for the roller coaster ride of any cryptocurrency, especially stablecoin.

Their cryptocurrencies blew up the market and they’re back

You understand that investing in stablecoins is just as risky as other cryptocurrencies. As an asset class, stablecoins are meant to be stable. But the very name is a misnomer, says Joe Rotunda, director of enforcement at the Texas State Securities Board. Rotunda is also Vice President of Enforcement at the North American Securities Administrators Association.

“There’s no guarantee they’ll actually be stable,” Rotunda said in an interview. “Someone who bought terra recently may have lost a lot more than if they bought one of the major cryptocurrencies. If you put your money in terra thinking it was a stablecoin, thinking it wasn’t going to fluctuate like bitcoin, you lost a lot of money.

Usually, stablecoins are backed by assets such as treasury bills or treasury bills rather than investing directly in the currency they track, said Madeline Hume, senior research analyst at Morningstar. Or it is an “algorithmic stablecoin”.

Investors experimented with the failing algorithm model with terra. Without regulation and oversight, there is no independent verification that the assets supposedly supporting other stablecoins are actually held in reserve.

“People should not take any type of cryptocurrency or any type of safe or secure investment at face value,” Rotunda said. “There are risks involved, even with stablecoins. »

Cryptocurrency’s fall is testing the sustainability of the hot industry

You understand the difference between investing and playing. You should never put all your money in one stock or asset class and certainly not in something as highly speculative as cryptocurrency. I asked Terraform Labs, the company behind terra, about reports of people investing their savings and losing most of their money.

Terra was “designed as a medium of exchange, not an investment,” a Terraform Labs spokesperson said in an emailed statement. “We have been clear with the public about the risks associated with UST. As with virtually everything else in life, each individual must decide for themselves what risks they are willing to take.

Traditional investing has the three main ingredients of time, diversification and compounding returns, Hume said. “And right now, crypto has none of that,” she said.

You understand that high returns also mean higher risk. The higher the potential profit, the more financial risk you expose yourself to. When you see high returns, you immediately have to ask yourself why an investment has to offer such a high return to attract customers.

“These assets are always at risk of being wiped out in a market event because quite often they rely only on the confidence of other investors,” Hume said. To expand on her point, Hume said that she has a cryptocurrency account and her husband has a sports gaming account. “To be honest, he did better than me,” she said.

What are Stablecoins? Why has TerraUSD gotten so wonky?

You understand that stablecoins are not as secure as money market funds. A money market fund is a type of mutual fund that invests in high-quality, short-term debt securities. A money market fund aims to maintain a net asset value of $1 per share.

Some investors may think of dollar-pegged stablecoins as the cryptocurrency equivalent of a money market fund. But they are not. Unlike stablecoins, money market funds are highly regulated.

“FOMO” is not your primary reason for investing. Don’t be afraid to miss out on or be swayed by cryptocurrency ads featuring Matt Damon and basketball icon LeBron James. They are already rich in real dollars.

Following the crowd in an investment you don’t really understand can lead to devastating losses. “Don’t give in to the fear of missing out,” Rotunda said. “Don’t listen to the endorsers. Matt Damon is not a financial advisor. You should not ask him for financial advice.

You want to transact using stablecoin. “It can be beneficial to keep money in stablecoins that are used elsewhere in the cryptocurrency ecosystem,” Hume said. “Because where investors really get stuck with cryptocurrencies is when they convert real fiat US dollars into cryptocurrency. »

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