Retail investors lose faith in cryptocurrencies after deep slump

Small traders flocked to digital tokens for quick returns despite regulators’ warnings that the asset class is high risk

The cryptocurrency market slumped last week as investors took money from more risky assets as worries over soaring inflation and rising interest rates increase. Reuters

Nofe Isah, a 25-year-old based in Nigeria, has been investing in cryptocurrency since January. Last week, she lost all her $5,000 in savings as cryptocurrency Luna went into free fall.

Ms Isah, a recently unemployed administrative officer, said she would never invest in cryptocurrency again.

“I can’t believe I fell for crypto,” she said. “I’m just trying not to get myself depressed. Crypto has taken my money, fine. It shouldn’t take my head.”

The cryptocurrency market, known for its wild price swings, slumped last week as investors yanked money from riskier assets on worries over soaring inflation and rising interest rates.

Bitcoin, the world’s largest cryptocurrency, fell as low as $25,401 last week, its lowest since December 2020. It hit a record high of $69,000 in November.

Small tokens were also hit, with Ether, the second-largest token, dropping more than 15 per cent to its lowest since June.

Luna, a digital coin widely promoted on social media and backed by institutional cryptocurrency investors, lost nearly all of its value.

Small traders such as Ms Isah have flocked to cryptocurrencies in the hope of quick returns, despite warnings from regulators that the emerging assets can be high risk.

Platforms such as Robinhood, which has 23 million customers across a variety of assets, helped to spur retail investing, including in cryptocurrency.

Around a quarter of Robinhood’s transaction-based revenue came from cryptocurrencies in the first quarter of this year, the company said in its latest earnings statement.

Overall user numbers at cryptocurrency platforms have ballooned. Binance, the world’s biggest cryptocurrency exchange, had some 118 million clients 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 tales of woe as retail investors spoke about their losses.

“I’m 49, with a big mortgage and three kids. My retirement party is on ice for the foreseeable future,” a user with the handle Boring-Fun-3646 said on Reddit.

Another user with the handle AdventurousAdagio830 posted on Reddit: “It doesn’t seem real that I lost $180,000.”

Emblematic of cryptocurrency risks was the collapse last week of TerraUSD, a stablecoin designed to keep a constant value by a complex algorithm that involved Luna.

When the coins came under heavy selling pressure, the system broke down. TerraUSD — designed to keep a value of $1 — traded around 9 cents on Tuesday, while Luna plunged to near-zero, based on CoinGecko data.

Tejan Shrivastava, a 31-year old graphic designer from Mumbai, who has been investing in cryptocurrencies for the past year, had his $250 investment wiped out by Luna’s collapse.

“It was stuck in a death spiral. All the money was gone in 15 minutes,” he said.

“I don’t even know if I’ll invest in crypto in the future. I have a crypto portfolio, but I am planning to liquidate it once it reaches break-even.”

Luna’s fall wiped out most of its market value, which had been at more than $40 billion as recently as early April, CoinGecko data shows.

Retail investors’ online frustration even spilt over into the real world.

Seoul police last week said they were seeking a suspect after an unidentified individual rang the doorbell of the apartment of Do Kwon, the founder of TerraUSD, and ran away.

Police would investigate whether the suspect had invested in cryptocurrencies, a Seoul police officer said.

Throughout its 13-year life, the cryptocurrency sector has been peppered by vertiginous climbs and sudden freefalls. In November, for instance, Bitcoin slumped by a fifth in about two weeks after touching a record $69,000. Six months earlier, it had tumbled by about 40 per cent in just nine days.

Yet cryptocurrency’s latest crash, which pushed the sector’s combined value to $1.2 trillion, less than half of where it was last November, led to the crushing of Luna, which on May 1 was the eighth-largest cryptocurrency by market capitalisation.

Cryptocurrencies are subject to patchy regulation across the world, with traders of Bitcoin and the panoply of smaller tokens typically unprotected against price slumps.

But it is difficult to gauge the scale of retail investors’ pain from the cryptocurrency plunge and the repercussions on appetite given the opaque nature of the market.

In Britain, more than 4 per cent of adults — some 2.3 million people — own cryptocurrencies, data published last year by the UK financial watchdog showed.

The regulator said understanding of cryptocurrency was falling compared with a year earlier, “suggesting that some crypto users may not fully understand what they are buying”.

World's 10 richest crypto billionaires — in pictures

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  Changpeng Zhao, founder and chief executive of Binance, is the world’s richest crypto billionaire with a net worth of $65 billion. Bloomberg

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  Sam Bankman-Fried, founder and chief executive of FTX cryptocurrency exchange, ranked as the second-wealthiest crypto billionaire with a personal fortune of $24bn. Bloomberg

• 

  Brian Armstrong, co-founder of Coinbase, is the third-wealthiest crypto billionaire with a net worth of $6.6bn. Bloomberg

• 

  Gary Wang, co-founder of FTX cryptocurrency exchange, ranked fourth with a net worth of $5.9bn. FTX

• 

  Chris Larsen, executive chairman of Ripple’s board of directors and former chief executive and co-founder of Ripple, rounded out the list of top five wealthiest crypto billionaires with a fortune of $4.3bn. Ripple

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  Song Chi-hyung, founder of Upbit, the largest cryptocurrency exchange in South Korea, has a net worth of $3.7bn. Courtesy: Dunamu

• 

  Tyler Winklevoss, chief executive and co-founder of Gemini Trust, left, and Cameron Winklevoss, president and co-founder of Gemini Trust, have a net worth of $4bn each. Bloomberg

• 

  Barry Silbert, founder and chief executive of Digital Currency Group, has a net worth of $3.2bn. Bloomberg

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  Jed McCaleb, founder and chief architect of the Stellar Development Foundation and co-founder of Ripple, has a net worth of $2.5bn. Courtesy: Stellar Development Foundation

Still, some small investors are keeping the faith.

Eloisa Marchesoni, based near Tulum in Mexico and investing with a cryptocurrency syndicate, said she would not give up.

“I am looking to buy the dip — we are all waiting for Bitcoin to go down to $22,000, which is not something too probable but not something that’s ‘not probable at all’.”

Ms Marchesoni is also hedging her cryptocurrency bets with physical assets — “cars because you can lease them, watches, real estate”.

Bitcoin was hovering around $29,765 on Tuesday, having lost more than 20 per cent so far this month.

Regulators remain on alert. The British government said last month it will regulate stablecoins.

The US Securities and Exchange Commission is toughening its stance. Gary Gensler, SEC chair, said this week investors in cryptocurrencies needed more protections.