Crypto currencies have crashed hard for the past week.
Most spectacularly, the value of Terra LUNA was wiped out 99.99% to become almost worthless.
Bitcoin value was shed more than half and Ethereum dropped by more than 30%.
Luckily, my exposure to crypto currencies was only less than $600. It was a new venture or rather an experiment by staking $500 worth of Cronos token for the Ruby Red Crypto.com debit card which gave 2% (Reduced to 1%) and free Spotify reimbursement. I also bought some Nano, Holo, Ripple, Cardono and Matic for fun. I do not intend to buy more nor sell them. Will keep all my crypto in cold storage.
With a conservative mindset, I have been sceptical on crypto currencies for a long time and only dabbled late last year after almost a decade of inception by Bitcoin.
Let me share 5 lessons learnt from this episode of crypto crash.
1. Portfolio Allocation is very Important
We would have suffered tremendous losses if we have allocated a relatively huge proportion of our assets to crypto currencies or worst case, LUNA.
If we manage our risks by exposing our investments in Bitcoin or other crypto currencies to at most 5% or 10% of our net worth or assets, we should be fine.
2. Cryptocurrencies have no Underlying Backing
Unlike a country's currency which is backed by its reserves or gold. Crypto currencies are purely driven by demand and supply of traders, investors and largely driven by fear and greed.
A company stock is almost the same as crypto but a company's equity can be backed by its fundamentals in terms of revenue, cashflow or profit generating ability of a business.
3. High Risk High Returns
The reason for high Annual Percentage Yield for crypto through staking or huge capital gains is due to its high risks.
Higher returns compensate for the great amount of risks that a crypto investor bear when he or her stakes their crypto on various crypto exchange platforms which again present more uncertainties and risks. Regulatory, systematic, unsystematic, forex, technology, political, corporate risks just to name some.
The same thing happens to bonds and funds whereby junk bonds and funds of developing economies present much greater yields than stable triple A rated bonds or funds comprising top quality blue chips businesses from US.
High risks translate into high returns, which at the same time means greater volatility and could present high potential losses.
4. Invest money that we could afford to lose
Similar to investment in stocks or buying lottery, we should only invest or punt using our spare cash or war chest that we do not need for our daily expenses.
We should always avoid using margin or leverage or borrow money to dabble in high risk financial instruments like stocks, bonds, options, derivatives and crypto currencies.
5. No Fear No Greed
Since more than 2 million years ago, humans were always irrational with emotions and usually made decisions largely driven by fear or greed.
Wars, fighting, looting, crimes, were all driven by greed. The inventions of weapons, cannons, guns, defences, castles, barricades were all due to fear and lack of sense of security.
Greed results in fear of missing out or FOMO thereby chasing higher and higher prices leasing to people buying crypto currencies at inflated prices.
Fear results in people running for exits and cutting losses to get back their money when shit hits the fan.
Cryptocurrencies were invented for humans with great intentions to resolve limitations of traditional currencies and for anyone on earth to own a stake of the Internet, make secured digital payments, store digital money safely, beat inflation in this digital world.
However, just like any financial asset, Cryptocurrencies become a great digital asset for speculative trading and punting other than long-term investment.
Every crisis is an opportunity and perhaps a great wake up call to budding and seasoned investors and traders of crypto.
"Cryptocurrencies were invented for humans with great intentions to resolve limitations of traditional currencies and for anyone on earth to own a stake of the Internet, make secured digital payments, store digital money safely, beat inflation in this digital world."
ReplyDeleteGreat thesis for BTC but you have no BTC? Instead, holding NANO, ADA et al. Adjusted for risk, how good is your R/R? V interesting choices!
I have professed that I am a conservative investor sceptical of crypto currencies and merely bought some altcoins for fun. To each his own.
DeleteSorry for sounding contemptuous. Even for alt coins, I think there are better ones out there, but... to each of his own, you're right. Anw u are still richer than me, who am i to say anything :P
ReplyDeleteI agreed that there are better altcoins and Bitcoin is worth investing for the long-term. However, like any other financial asset, invest or trade with due dilegence and proper risk management.
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