For the most part, I’ve stopped riding the scariest roller coasters.
I used to like the exhilaration of the climb and the emotional high of screaming as the ride plunged down and around curves at hair-raising high speeds. But then I started to get headaches from the tension of anticipating the stomach-churning steep drops. The dizzy feeling I get after stumbling off the ride just isn’t fun anymore.
This is how I feel about investing in cryptocurrency. As thrilling as this new technology is, it’s not worth the jerky and unpredictable movements.
Some folks thought they found a way to ride the cryptocurrency roller coaster and minimize wild drops by investing in stablecoins. The concept behind stablecoins is that they are supposed to maintain a certain value. They are promoted as less risky relative to the volatility of investing in other cryptos, such as bitcoin or ethereum.
That promise of stability failed to deliver when Terra, also known as UST, imploded. It was designed to maintain its value of $1. It didn’t. Not by a long shot.
Even the most popular stablecoin in the world, Tether, dropped below its price of $1 in May. Online you can find postings on Reddit and Twitter from people distraught and surprised at their spectacular losses after betting big on Terra.
“It’s very important to prepare yourself psychologically” for “the loss otherwise mental issues make it even worse,” one Reddit user wrote.
I like to use times like this as a teaching moment. Before you put your money in stablecoin, you need to ask yourself a lot of questions, because this isn’t a ride for the financially faint of heart.
Here is how to tell if you have the stomach for the roller coaster ride of any cryptocurrency, particularly stablecoin.
You understand that stablecoin investing is just as risky as other cryptocurrencies. As an asset class, stablecoins purport to be stable. But the very name is a misnomer, says Joe Rotunda, director of enforcement at the Texas State Securities Board. Rotunda also serves as vice chair of enforcement at the North American Securities Administrators Association.
“There’s no guarantee that they actually will be stable,” Rotunda said in an interview. “Someone who bought Terra recently may have lost a lot more than if they had bought one of the mainstream cryptocurrencies. If you put your money into Terra thinking it was a stablecoin, thinking it wasn’t going to fluctuate like bitcoin, you lost quite a bit of money.”
Usually, stablecoins are backed by assets like Treasury bills or commercial paper rather than directly investing in the currency they track, said Madeline Hume, a senior research analyst at Morningstar. Or it’s an “algorithmic stablecoin.”
Investors experienced the failed algorithm model with Terra. Without regulation and oversight, there is no independent verification that the assets supposedly backing other stablecoins are actually being held in reserve.
“People should not take at face value any type of cryptocurrency or any type of investment is safe or secure,” Rotunda said. “There are risks involved, even with stablecoins.”
You understand the difference between investing and gambling. 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 life 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 email statement. “We were clear with the public about the risks involved in UST. As with virtually everything else in life, each individual must decide for themselves what risks they are willing to undertake.”
Traditional investing has the three main ingredients of time, diversification and compounding returns, Hume said. “And right now, crypto has none of those,” she said.
You get that high yields also mean a higher risk. The higher the potential profit, the more financial risk you are exposing yourself to. When you see high yields, you should immediately raise the question of why an investment needs to offer a yield that high to attract customers.
“These assets do still have the risk of getting wiped out in a market event because a lot of times all they’re relying on is the confidence of other investors,” Hume said. To further her point, Hume said she has a cryptocurrency account and her husband has a sports gambling account. “To be honest, he’s done better than I have,” she said.
You understand that stablecoins are not as safe as money market funds. A money market fund is a type of mutual fund that invests in high-quality and short-term debt securities. A money market fund aims to maintain a net asset value of $1 per share.
Some investors may view stablecoins pegged to the dollar as the cryptocurrency equivalent of a money market fund. But they’re not. Unlike stablecoins, money market funds are highly regulated.
“FOMO” is not your primary reason for investing. Don’t have fear of missing out or be swayed by the cryptocurrency commercials featuring Matt Damon and basketball icon LeBron James. They’re already rich with real dollars.
Following the crowd in an investment that you don’t really understand can lead to some devastating losses. “Don’t give in to fear of missing out,” Rotunda said. “Don’t listen to the endorsers. Matt Damon isn’t a financial adviser. You shouldn’t take financial advice from him.”
You want to transact using stablecoin. “It can be beneficial to keep money in stablecoins that are getting used elsewhere in the cryptocurrency ecosystem,” Hume said. “Because where investors really get clipped with cryptocurrencies is when they’re converting actual fiat U.S. dollars into cryptocurrency.”