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20 May 2022

Crypto crash: what’s going on, and can cryptocurrency recover?

Cryptocurrency and NFT values have plunged in recent weeks
Bitcoin logo with downward chart behind it

A crypto token lost 99% of its value last week, dragging multiple cryptocurrencies down with it. 

Last Thursday the Terra stablecoin collapsed, worrying the sector’s investors. Many lost confidence and began to sell, torpedoing the value of the broader crypto market. 

This comes after a few widely reported cases of NFTs (non-fungible tokens) dramatically failing to match or exceed their original sale value at auction.

Here, we look at what’s caused cryptocurrencies to plummet, and share advice on how to keep your investments safe.

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What caused the 'crypto crash'?

The cryptocurrency collapse was caused by a lack of investor confidence. With panicked investors selling, values have plummeted. 

It started with the stablecoin, Terra. Stablecoins are cryptocurrencies that aim to have fixed values, often pegged to the US dollar. 

Terra kept its stable value – at least at first – due to an algorithm. But last week the coin's value fell after it ‘unpegged’ from the dollar. It’s now worth less than one US cent, according to CoinMarketCap. The reason for its failure is subject to speculation, but it's had wide-ranging repercussions on the rest of the market nonetheless. 

Many crypto investors panicked and began selling their holdings, which in turn affected the value of more well-known coins. 

One Bitcoin – the most valuable cryptocurrency by value – is now valued at around £24,000, down from £48,000 in December last year. 

Ethereum, the second largest coin and the foundation of most NFTs, lost a fifth of its value in just 24 hours. One Ether is now worth around £1,600, down from more than £3,400 in November. 

The value plunge led Guardian technology editor Alex Hern to ask if Terra’s fall could be a ‘Lehman Brothers moment’ for cryptocurrency, referring to the infamous collapse that became emblematic of the 2008 stock market crash. 

What's happening with NFTs?

Meanwhile, we’ve seen several high-profile examples of NFTs losing value. NFTs are tokens that denote ownership of something digital, typically an image. 

Investor Sina Estavi bought an NFT of Twitter founder Jack Dorsey’s first tweet for $2.9m in March 2021. 

Just over a year later in April 2022, he put the NFT on the market with a $48m asking price. The bids didn’t come close. The highest offer was just $14,000. 

Similar stories have been reported about the popular CryptoPunk series of NFTs. One of these pixelated cartoon heads – bought for $1m sixth months ago – sold for just $139,000 this month.

Areas of land in the Sandbox metaverse are also reportedly being sold at a loss, possibly due to dwindling confidence in the project. 

These headlines paint a very different picture to the ones we saw last year, when record-breaking NFT sales led the narrative. They highlight the very real possibility of huge losses for investors in the sector.

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Can cryptocurrency recover?

If you’ve already invested in cryptocurrency, you might be wondering what to do.

The most successful investors usually take a long-term approach, riding out ups and downs in the market. By that logic, it would be unwise to ‘cash out’ now. 

But this advice was originally applied to the stock market - cryptocurrency is much newer and its long-term prospects are unknown. 

While Bitcoin has bounced back from declines in the past, it's hard to say what will happen next. There’s also the possibility it could fall further, or stay at this level for a long time.

One option is to pick a value for the cryptocurrencies you hold and, if they drop below this, sell them immediately.  Many trading platforms will let you set up a 'stop loss' to automatically sell, taking some of the emotion out of the decision. 

Consider how the loss could impact your lifestyle, or if you are investing money you could always afford to lose.

Consider the risks before you invest

Cryptocurrency and NFT investing is unregulated, meaning you don't have the same protections as stock market investing. 

For instance, if you invest in the stock market, you'll be covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 in certain cases where you're given negligent advice, a victim of fraud or an investment firm goes bust.

If you're considering an unregulated investment, consider the risks before you make a decision about whether cryptocurrency or NFTs are right for you. Our latest Which? Shorts podcast episode explains the ins and outs of cryptocurrencies, and whether you should consider investing.