Last week the cryptocurrency market lost $320 billion of value in a single day.
A loss of confidence in two stablecoins, a type of cryptocurrency linked to real world assets such as cash or bonds, meant to be protected from volatility, caused the cryptocurrency market to fall about 30%.
But New Zealand crypto exchanges say they have seen an increase in local investors buying into the volatile market.
Financial experts wonder if a 30% crash in value does not alter the behaviour of cryptocurrency investors, will anything?
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Cryptocurrencies, such as bitcoin or ethereum, are lines of code designed to function as digital currency.
A stablecoin is a type of cryptocurrency in which the value is tied to another currency or financial instrument, in an attempt to avoid the volatility of broader crypto market.
But last week the value of two important stablecoins dived. Terra, a stablecoin supposedly matched to the value of the United States dollar was trading at US0.13 cents (NZ0.2c) last week. Another stablecoin, luna, crashed, trading at only a fraction of a cent.
After the value of two supposedly stable cryptocurrencies fell so drastically, panic in the wider crypto market sparked widespread withdrawals.
By the end of the week the entire crypto market lost US$400b (NZ$634b) in value.
How are New Zealand investors reacting?
Easy Crypto chief executive Janine Grainger says New Zealand investors reacted by buying more crypto.
May is already the highest trading volume month for Easy Crypto this year.
Between 90 and 95% of trades are people buying, but value remains even between buys and sells, which means certain investors are selling off in large quantities, while most are buying smaller amounts, Grainger said.
But Grainger became concerned when she noticed investors buying tether and luna as they plummeted in value.
To stop this behaviour she made the decision to remove the tether and luna coins from the platform.
“While we don’t know people’s motivations for investing in crypto, if something is dropping in value significantly and people are buying, there is an expectation that they are ‘buying the dip’.
“Right now we need to make sure we are not selling our customers something we are not able to deliver on.”
Experts say investor behaviour troubling
Simplicity managing director Sam Stubbs says relying on a crypto exchange to self regulate is like asking the fox to look after the hen-house.
“When the exchanges are worried, then you have a serious problem, because their incentive has been to get people to trade as many of these things as possible,” he says.
Stubbs says he is not surprised to see New Zealand investors continue to invest in the digital asset as the value drops, because it reinforces his belief cryptocurrency investment is gambling.
“When a gambler is losing, they will often double down. That is exactly the behaviour we are seeing here.”
Financial adviser and cryptocurrency expert Darcy Ungaro also says the behaviour is troubling.
It is worrying to see a ‘buy the dip’ philosophy applied to cryptocurrencies, because most coins can become completely worthless at the drop of a hat, he says.
“A lot of crypto-assets outside of bitcoin are either going to make it, or fail. They usually don’t do anything in between. That is why you never want to buy the dip on most of these coins. If the price goes down, it is probably on its way to failure,” Ungaro says.
The crash is a positive thing for the cryptocurrency industry overall, he says.
“This is going to shake out a lot of people who are in this for the wrong reasons. We will see less money allocated to ‘meme-stocks’, and capital will flow towards strong performers, which will strengthen the market.
“It’s just unfortunate that some people who were suckered in for a quick buck will have got nailed.”