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How to avoid the pitfalls of crypto investing in preparation for the next bull run

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When you think about the collapse of the cryptocurrency, the expression “20/20” comes to mind. Since peaking in November 2021, the total crypto market capitalization has fallen by about 70% in price, and crypto investors, no matter how early they bought, feel at a loss.

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Verena Ross, chair of the European Securities and Markets Authority (ESMA), said investors should view the crash as a “warning lesson” when investing in unregulated assets. FT.

“I think there is a real question about how many of these [crypto assets] will survive. . . I hope that some of these investors will see this and learn the cautionary tale, if only to think about how much of their money they are investing in such assets.”

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Ross noted that earlier this year, ESMA warned retail investors of the serious risks associated with investing in cryptocurrencies, implying that financial losses due to the downturn are self-evident.

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While there is some truth in this, there is also an oversimplification for several reasons. First, regulated assets are currently on a downward trend as well. And a significant attraction of investing in digital assets lies in its anti-authority spirit, which goes beyond short-term price movement.

However, price remains the primary yardstick for measuring success or failure, and even the most die-hard crypto proponents will feel pain where it hurts — in their portfolio tracker.

To draw attention to this issue, Cryptooshala contacted several industry figures to see what lessons can be learned.

Industry leaders share their thoughts on the crypto crash

Russell StarrCEO of Crypto Exchange Traded Products (ETP) Valor, warned that “get rich quick” schemes didn’t work. He expanded on this by saying that users should be more mature about investing in cryptocurrencies, especially when doing proper due diligence.

All markets move in cycles, and building an investment strategy around “optimistic growth forecasts” is “doomed to fail” at some point, Starr said. At the same time, the recent crash convinced of the importance of recognizing that crypto markets, like all markets, move in cycles.

“The recent downturn will serve as a wake-up call for many investors – cryptocurrencies, despite having ample runway and room for growth, are still subject to the same cyclical market conditions as all other assets.”

Starr concluded by saying that the key lesson to learn is to manage risk taking and be satisfied with “realistic sustainable returns.”

Harry Kruglyakovfounder and CEO GOGO protocol as well as 0VIXthere was a similar message to Starr saying that the expectation that markets would continue to rise forever was wrong.

Kruglyakov also noted that rapidly changing market variables often do not take into account the state of the market, which takes investors by surprise. Building on this with an example, Kruglyakov said that in the case of DeFi, the available models (for risk assessment and health analysis) do not often assess a user’s “creditworthiness”, which can lead to over-exposure.

“If we narrow down to DeFi, for example, we know that the health and stability of the credit system depends on the collateral value that borrowers provide, but while risk assessment of asset price fluctuations has improved, models often fail to consider users to give and borrow multiple assets.”

Macroeconomic picture

By joining the investor analysis, Michael RosmerCEO and co-founder DeFiYieldsaid time-to-market timing is “usually fruitless”.

Echoing the adage that past performance does not predict future moves, Rosmer pointed out that, unlike previous cycles, the recent bull market did not end with a sharp drop. Thus giving investors watching this a false sense of security. The lesson here is to let go of entrenched market expectations.

“People also believed that we would see the top fall because it had happened in previous cycles. But this kind of thinking does not allow you to understand that the markets behave depending on what people expect and what they are preparing for, so often what people expect is unlikely to happen.

Speaking of inflation, Rosmer noted that investors mistakenly believed that rising inflation equated with rising asset prices. However, as we see now, rising inflation has led to aggressive actions by central banks and poor asset price performance.

Concluding his advice, Rosmer advised investors to be wary of price euphoria as he sees it as a leading indicator of an overly hot market. In times like these, the smart game would be to reduce exposure to risk.

“Learn to reverse the cycles and think about risk when the market is going down and up, taking risks when the market is going up and going down, and noticing a high correlation with the overall stock market.”

Bitcoin is the leading cryptocurrency for a reason

Bitcoin fared better than alts overall, losing around 70% of its value from its November 2021 all-time high (ATH). By contrast, large-cap big-cap losers include: Solana as well as Algorandwhich is 87% and 92% less than ATH, respectively.

As for the lessons to be learned, Max Keizer said, “There were no new lessons.” in the sense that investors should already have learned from previous crashes. However, he warned that unscrupulous people would continue to persecute “a new generation of naive, greedy suckers.”

For this reason, Keyser does not support complex, high-yield DeFi products or alternatives in general. Instead, the only way to “avoid the madness” and protect yourself is to stick with bitcoin and hodl self-storage, Keizer said.

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