In this lesson
- find out what stablecoins are for and where the catch is
- understand what altcoins are and why most of them do not survive
- see how a cryptocurrency worth tens of billions of dollars vanished in a few days
There are thousands of cryptocurrencies. Some have large teams and billion-dollar networks behind them, others started as a joke about a dog. To begin with, it helps to sort them into three groups.
Stablecoins: crypto that (mostly) stands still#
A stablecoin is a token whose price is meant to stay the same – most often 1 dollar. The best known include USDT and USDC. The issuer promises to hold a real dollar or safe bonds in reserve for every token issued.
What is that good for? On exchanges, stablecoins are used as a "parking spot": you sell bitcoin for USDT and do not have to send the money back to a bank. And you can send them anywhere in the world within minutes.
The catch is trust: a stablecoin is only as stable as its issuer is honest and its reserves are good. 2022 showed the worst case.
The fall of Terra/LUNA: 99.99% in a week#
The UST stablecoin did not hold dollars in reserve. Its price was kept at one dollar only by an algorithm tied to a second cryptocurrency, LUNA. On 9 May 2022, UST lost its peg to the dollar and a spiral began: people sold UST, the algorithm printed more LUNA, and LUNA fell faster and faster.
- UST ≠ $1: May 9, 2022
- Crash: May 9 – 13, 2022
From 119.55 dollars in early April, 0.00005 dollars was left on 13 May. Then Binance ended trading. A cryptocurrency that ranked among the largest in the world practically vanished in a few days.
Altcoins: everything else#
The word altcoin is short for "alternative coin" – any cryptocurrency other than Bitcoin. It covers big networks like Ethereum, but also thousands of small projects promising to be "faster", "cheaper" or "revolutionary".
Most of them disappear within a few years or lose almost all their value. Before putting money into one, ask:
- Who is behind the project? Real names, or an anonymous team?
- What problem does it solve? Does it do it better than what exists, or does it just promise?
- Who holds most of the coins? If it is the creators, they can sell any time.
- Does it promise a sure profit? Then run.
Memecoins: a lottery with a dog#
A memecoin is a cryptocurrency born from an internet joke. The best known is Dogecoin, launched on 6 December 2013 as a parody featuring a Shiba Inu dog. Memecoins usually solve nothing – their price is driven only by attention on social media.
Memecoin prices can shoot up hundreds of percent in a day – and fall just as fast. It is more of a lottery than an investment. And unlike a lottery, nobody checks whether the draw is rigged.
The smaller the coin, the bigger the risk
Small altcoins and memecoins are easy to manipulate: a few big players buy in, stir up hype and sell to those who came late. Be prepared to lose all the money you put in.
Common myths#
- "A coin at 0.0001 dollars is cheap, it can easily go up a hundred times." The price of one coin tells you nothing. What matters is what all coins are worth together (market capitalization). If there are trillions of them, even a tiny price means a huge value – and a hundredfold rise is nearly impossible.
- "A stablecoin is as safe as money in a bank." It is not a bank deposit, and no deposit insurance covers it.
- "If it is on a big exchange, it has been checked." LUNA was on every big exchange.
Summary
- Stablecoins keep their price around a dollar – only if the issuer is honest and has reserves.
- The algorithmic stablecoin UST, and LUNA with it, collapsed within days in May 2022.
- Altcoins are all cryptocurrencies other than Bitcoin; most of them do not survive.
- Memecoins started as jokes and are driven by hype alone – they are a lottery.