As we begin the new year of 2023, it becomes extremely important for all of us as participants in the crypto market and the ecosystem as a whole to be mindful of all that we have learnt in the past year and make sure we don’t repeat the same mistakes. Mistakes are bound to happen, especially when something is this revolutionary and new – however, repeating those mistakes is stupidity. Hence, let us revisit and take a look at some of the most crucial and important lessons we learnt in the year 2022.
1. Nothing is too big to fail
We’ve all heard the term – ‘too big to fail’ being associated with investment banks and conglomerates that are simply so large and so profitable that these entities would continue to run like well oiled machines for years and years. These are so big that when calamity befalls them, governments swoop in to resuscitate and revive these entities because they are too valuable in the world to be lost. The 2008 financial crisis taught us that very well.
However, in the world of crypto – it doesn’t hold true. The world of cryptos is still at a very nascent stage, even if we were to consider the market at its peak back in November of 2021. That was when the crypto market cap had almost touched $3 trillion and is currently trading around $800 billion after the bear run 2022.
However, this year we saw the crash of the Terra LUNA ecosystem post the UST depegging fiasco and also, more recently, the devastating collapse of the FTX crypto exchange. At its peak, LUNA was in the list of top 5 layer-1 blockchain solutions in the market and in case of FTX, it was the third largest centralized crypto exchange in the world by volumes. But still, we saw both those fall and come to a dramatic end amid the bear market of 2022. This brings us to our next point ->
2. Avoid excessive leverage at all costs
We all know the benefits of leverage. Leverage as a concept has practically redefined the modern world of finance and mind you, it happens to be extremely important too. Leverage is one of the most important tools that investors have in their hands to multiply their buying power in the market and create returns that are in excess of the market indices. Even companies and firms use leverage – instead of issuing stock to raise capital – one can use debt and leverage to strategically invest in business operations to increase shareholder value.
While there are many many more benefits of leverage in the world of finance as a whole – one must understand that it is something that can get the better of people too. Leverage taken too far on the basis of greed and whims can destroy wealth faster than it can multiply. This is something that should be kept in mind.
This isn’t just applicable for the crypto market – the 2008 financial crisis was also an outcome of overleveraging of poor quality assets too. In the world of cryptos – we saw many heavyweight crypto firms applying for bankruptcy under this proposition too ranging from major crypto lenders like Celsius, Babel Finance, Three Arrows Capital (3AC) have all faced similar troubles over unchecked leveraging in a market as volatile as cryptos.
Read more: Top Crypto Moments of 2022
3. Don’t HODL blindly
During a bull run, it is often propagated that HODLing is the best thing there is in the crypto market. That is also sometimes the case for traditional equity markets too – where holding for the long term is propagated. And whenever this idea is doubted, one or the other coin or stock, whatever the case may be – will be pointed out that has given outstanding returns over a longer time period.
While, it can be agreed that long term is a very viable strategy to profit from an asset class, it must also be understood that not all assets go on to become truly multibaggers – only the ones that do give outstanding returns are remembered and cited as examples. Hence, HODLing blindly isn’t a good idea.
Rather, what can be a more smarter way of truly HODLing would be to essentially revisit your crypto portfolios, check out all the coins you have invested in and try to think from a very unbiased point of view why holding on to each particular asset in your portfolio makes sense. If they still make sense, HODL! If they don’t, rebalance.
Read more: Questions to ask before you buy crypto in 2023
4. Timing the market is impossible!
This is an old adage that has been coming in from the days of old, even before crypto markets existed and still holds true for any asset class open market. It is practically impossible to time the market tops and bottoms. No investor or trader has ever been able to buy the dip at the lowest point possible and exit to book profits at the highest point.
Usual market psychology tells us that most people typically respond in the opposite manner in the real market. People get worried when the market drops and begin selling their assets worrying about a further fall. On the other hand, during a bull run everyone is buying, and every one is seemingly making a profit – until, of course – when the market inevitably corrects. That is the usual nature of the market.
Having a solid investment strategy with reasonably regions of entry and exit, having strategized stop losses for trades – is possibly the most viable way to invest or trade in the crypto market reducing the risk of running excessive losses.
Read more: Why should Investors continue SIPs in bear market?
5. Crypto doesn’t exist by itself
What this means is that crypto as an asset class might be something that is very novel and new but at the same time, one must remember that to obtain a particular crypto directly, you need a fiat currency. On the other hand, if you want to obtain a particular crypto in the traditional method, for example – mining – you will still need that fiat currency to purchase mining equipment and pay for electricity and other mandatory bills.
Hence, while many might think this – but crypto by itself doesn’t exist in a vacuum. It is impervious to the global macroeconomic situation and thus, during Covid-19 when all the governments of the world were printing money faster than plain paper – the cost of capital itself had come down which resulted in a lot of spare income that people wanted to invest – and crypto was one of the most attractive ones to make a quick buck. Thus, from the end of 2020, up all the way to the end of 2021 – the crypto markets saw one of the biggest bull runs that propelled the overall crypto market cap close to $3 trillion at one point.
But with the beginning of 2022, we saw the pandemic ebbing away and government introducing fiscal measures and quantitative tightening procedures to pull out the excess liquidity in the markets. This is a simple macroeconomic move always undertaken by central bankers of all countries to ensure that the economy doesn’t go down into a bubble and then burst like it did back in 2008. Hence, with the US Federal Reserve sucking out liquidity – crypto markets along with markets of all other major asset classes saw major dips all across the board.
Thus as an investor in the crypto market, one should also be aware of the broader macroeconomic situation of the world and make their investments smartly.
While this is a list of the top 5 most important learnings we have gleaned from the year 2022 – take a look at this tweet thread by popular crypto analyst Miles Deutscher on his whole list of crypto lessons learnt in 2022. You won’t regret it!
22 Crypto Lessons Learnt in 2022. 👇
— Miles Deutscher (@milesdeutscher) December 29, 2022