During the early days of cryptocurrencies, some financial advisers would have counselled that people should invest in this new asset class only if they were prepared to lose their entire investment. It would appear that after more than a decade, this advice is still valid for at least some crypto assets. Over the years, thousands of cryptocurrencies and tokens have come and gone. Last month, the so-called stablecoin Terra and its sister token Luna lost almost 100 per cent of their value in just over a month, wiping out more than US$40 billion (S$55 billion) in valuations. Even the longest-established crypto asset, Bitcoin, remains highly volatile and is down more than 50 per cent since its record high last November, while its smaller peers have fared even worse.
The Monetary Authority of Singapore has repeatedly cautioned retail investors against trading in crypto assets, a warning reiterated by Deputy Prime Minister Heng Swee Keat on Tuesday in the wake of the crypto crash last month. The crash has brought into sharp focus many of the risks of trading in crypto assets. Unlike traditional financial assets such as stocks and bonds, there are no fundamentals - such as earnings or book values - to serve as the basis for which valuations can be made. Adoption is driven largely by bandwagon effects and the fear of missing out, which lead to speculative excesses. As the Terra-Luna crash has demonstrated, stablecoins - which are supposed to track the US dollar - are often anything but stable. Some claim to be backed by dollar reserves but they have not been audited. Others, such as Terra-Luna, claim that algorithms render them stable, which has proved to be false.