Crypto Crash: Should you be worried?
Understanding what’s happening in crypto and whether or not you should care.
Well, the time has come. We must finally talk about cryptocurrency in this week’s
Ask Me Anything.
“Should I be worried about the crypto crash?”
Woof, a heavy question that I’m going to break down into a super short answer and a you-should-probably-still-read-it longer answer.
Not too much, so long as your investments aren’t exclusively tied to cryptocurrency. Remember, an important part of riding out any market crash is to have a well diversified portfolio. However, there are other indicators of a looming recession and that should encourage you to financially prepare.
Let’s start with a disclaimer that I’m no crypto expert. This is meant to be a high-level overview of recent events to help contextualize whether or not you should personally be concerned.
The stock market and crypto are both rocking-and-rolling right now. But crypto currency is still a new, fairly untested asset class* compared to the historical data of the stock market. That can make it harder to feel reassured that it will cycle back up in the same way as the stock market.
When there is volatility in any market, lots of people will sell their investments. This is usually due to fear and/or an attempt to lock in a return (or minimize a loss) before the investment drops even lower. This is typically referred to as
panic selling and will drastically impact the price of an investment.
Reminder: Your goal should be to have a well diversified portfolio that will withstand ups-and-downs and therefore reduce your knee-jerk reaction to panic sell, particularly with traditional stock market investing. A well diversified portfolio is not exclusively invested in cryptocurrency, even if it’s invested in multiple currencies.
It’s important to recognize that this is not the first time Bitcoin, which is just one of many types of cryptocurrencies, has crashed. However, it’s dropped more than 50% in value from November of 2021. The entire cryptocurrency market also lost approximately half its value in early May (but it has started to gently trend back up).
Part of the chatter around the current crypto crash is tied to the cryptocurrency Luna and its related “stablecoin” TerraUSD.
I’m not going to go into a deep dive on cryptocurrency and stablecoins. The high-level overview is that cryptocurrency is famously unregulated and decentralized. Stablecoins, however, are supposed to be less volatile because the value is pegged to another currency or commodity. In the case of TerraUSD, it’s tied to the U.S. dollar and supposed to be 1:1. Meaning one TerraUSD was worth $1. The cryptocurrency tied to TerraUSD is called Luna. When TerraUSD suddenly started to lose value and was no longer 1-to-1 with the U.S. dollar in early May, Luna’s value also plunged. Notably, no cash reserves were actually being held to back TerraUSD and it was tied to an algorithm.
So, what does all this mean for the U.S. economy?
I’m not an economist. However, I don’t think a crypto crash is any more alarming than the impact of inflation or the rise in consumer debt.
Listen, recessions are a normal part of an economic cycle. It sucks, but it’s reality. We should all take steps to shore up our finances in ways that reduce our personal stress about a recession. That could mean focusing on multiple streams of income in case of job loss. It could mean beefing up an emergency fund. It could mean not anxiously checking in on retirement accounts and other investments.
Sorry for being a bit of a Debbie Downer this week!
*Asset class: A grouping of similar investments. E.g. stocks, bonds, cash, real estate, art, crypto, etc. It’s like saying lager, IPA and stouts are all beers. Those are different types of beer, but beer is the overarching asset class.
Interested in learning more about what caused this crypto crash? I recommend subscribing to Crypto Island and giving the latest episode a listen.