We all knew that a crypto winter was coming. After all, summer doesn’t last forever much as it feels like it will! The signs that winter (crypto talk for a big crash) was fast approaching were all there like overspeculation and hyper-leverage but no one knew how bad things would get. No one thought that coins would practically go to zero and that crypto companies would go bye-bye. It’s carnage out there and we’re starting to see who’s been swimming naked.
Take Voyager, who lost 98% of its market cap! That’s an entire company going down under not to mention a whole load of shareholders who suddenly lost their pants. No wonder Elon is trying to ditch this Twitter deal. Mr Musk gave them unsecured loans (along with Celsius and 3AC who btw also went belly-up) and is set to lose from its bankruptcy. Big time. Though something tells me that Mr Billionaire is more than capable of nursing his losses. Retail investors on the other hand? Hmm. I’m not too sure!
Here are 5 lessons that we can learn from all this damage to hopefully emerge stronger and more financially resilient. There’s nothing like learning from the mistakes of others! That’s what the smartest people do. But if you have made any of these mistakes, it’s okay. We humans learn more when we mess up than when others do.
Either way, this is gonna be a learning curve!
Okay, let’s get stuck in with lesson numero uno:
#1 Not your keys, not your coins!
If you’ve come across a crypto bro or are on Twitter, you’ve for sure seen this phrase. And boy have recent events shown just how true this statement is.
The crypto space is still unregulated which is why we must tread with caution and always read the small print (we’ll get to that later). It’s for this reason that in this space companies can get away with a lot more than if gov bodies cracked down on them.
Take a UK bank that’s regulated, this means that your deposits are guaranteed up to the value £85k. In other words, should the bank go belly-up, you’d be paid out as much as you’re owed until that threshold. With crypto companies, this isn’t the case.
What companies like Voyager and Celsius did (and were able to do) was to halt withdrawals so that retail investors couldn’t access their very own cash! Retail investors end up losing their money and many were never paid in full. Though maybe after this fresh wave of crypto collapses central bankers will finally get their act together. But don’t wait around.
If you’re really serious about crypto investing, do yourselves a favour and buy a ledger. Keep your coins in cold hard storage. I recently took my coins (or shall I say a tiny fraction of one!) off of Coinbase and onto my ledger. It was super easy to set up even for a non-tech person like me. The advantage of this is that if the exchange goes bust (like some clearly did) then who cares. Your coins are not held by some third party who decided to take risks on your behalf, without even asking you. How rude, right?!
Well, having a ledger will mean you don’t need to worry and stress about all of that. It’ll also reduce the chance to buy/sell on noise. Cold hard storage is the way to go.
#2 If something sounds too good to be true, it probably is!
Voyager was able to offer crazy-high interest rates to its depositors as well as easily accessible loans that folk couldn’t get from most financial institutions. Need I remind you banks are still paying us a silly 0.1% on our deposits. So tell me how you think it’s possible to get 8%+? Even a few percent is stretching it. But anyway, a lot of people fell for it.
To most retail investors who had their money with them, they didn’t even question how on earth Voyager would be able to offer it. This stems in part from the fact that things like money, debt and all the rest of it aren’t taught in schools. This means that many lack the confidence to even think to question things or think about questioning things!
Another part to it is that people are looking for a get-rich-quick fix. Social media has made us think everything will be handed to us. Pronto. But easy come, easy go. Nothing worthwhile ever came easily. So stop looking for a quick fix. Be in it for the long-run.
You’ve gotta do your own due diligence and never take anyone’s word for anything. Least of all from a celeb who is literally paid to promote the biz. If that doesn’t smell dodgey then I dunno what does.
On that smelly note, that’s get to #3.
#3 don’t invest more than you can actually afford to lose
We don’t take this seriously enough. When we invest – especially in risky areas like the crypto world – do we actually ask ourselves that if our investments were to turn sour would we be able to go on as we used to?
If the answer is yes then you’re good to go but if the thought of losing all (or most) of the money you’d invested then you know what to do. Though knowing the fact and living through it are two very different things! Trust me!
So look at your net wealth, you stage of life and what financial goal(s) you’re working toward. That should tell you whether you will invest in such areas like crypto and crucially what % of your net wealth should go to the area.
Listen to yourself and yourself only. What works for you, not what works for others. It’s easily to get pressured into investing into ‘that thing’ but if you don’t understand it and if you can’t (or don’t want to) handle the risk, then ditch it. Now. Personal finance is personal for a reason 🙂
#4 Be greedy when others are fearful
The time to be accumulating crypto is when everyone else is too scared. When coins are at their ATHs, that ain’t the time to piling in. Of course, no one can time the markets (and nor should you!) but you do get a sense of where we’re at in the cycle. Psst: check Bitcoin’s fear/greed index! Most folk (apart from all yo HODL’ers) pile right in when stuff is at their peak and they sell on the down. If you wanna actually make some money and end up sitting on a whopper pile of returns, do the opposite!
Take bitcoin: the primal crypto. The coolest of all. It’s been on a wild, wild ride. It flew to $69k only to come crashing down to $19k. See, most (newbies) bought at the $69 and sold at the $19. It should be the other way round but fear gets the better of us so when you smell fear don’t be afraid to take advantage of it! In times of peak fear, assets get transferred from the fearful to the greedy. Be in the latter camp.
During these times, it makes financial sense to load up on the kind of crypto you a) believe in and b) plan on holding for a while. And do this when markets are low. When sentiment is weak and when investors are too afraid. From where I’m sitting, it feels like that’s now. Companies and coins collapsing tend to have that effect! Keep your long-term goals at the front of your mind but remember to take action when you need to.
#5 Cash is king
This one follows on from #4. When markets crash, be it in crypto/stocks, whatever, you’ll probably want to increase your holdings. But we rarely have cash lying around for such special purposes unless we make a conscious effort to!
A certain crypto biz called FTX has pounced on the ruins that unfolded in recent days and weeks. The founder sees extreme potential in the crypto space and at these depressed valuations, he isn’t holding back.
The time to be greedy is when others are fearful – but this’ll only work if you’ve got enough greed cash!
Work on building that greed cash buffer. One day it’ll come in handy.
And you literally can’t put a price on flexibility and liquidity. Being able to act when others can’t (or won’t) is a superpower. Embrace it!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.