Many people think crypto will go up forever.
This way of thinking makes me nervous. I spend a lot of time on Twitter and the general consensus about crypto is way too confident. The price predictions have become outrageous. No coin is hitting $1 million by the end of the year — I don’t care how many influencers say it.
Whether it’s crypto, stocks, bonds or real estate — what goes up must come down. The official term is “bear market.” I’ve been in the crypto game a long time. The crypto crash of 2018 caused me a lot of pain. Here’s what I learned that can help you make better decisions about crypto investing.
Long-term conviction is crucial
In 2018 the biggest cryptocurrency, Bitcoin, dropped by more than 80%. Ethereum, the second-biggest crypto, plummeted shortly after.
In 2018 it wasn’t clear whether crypto would be banned. What tanked the market was the China ban on crypto. The general consensus was that other countries like the US would do the same. The use cases for crypto were limited. Crypto solved the problem of startups that wanted to raise money. A new product called ICOs allowed anybody to create a coin, promise the world, and take investor’s money. This led to wild speculation.
I learned that crypto only makes sense if you have long-term conviction that blockchain technology is here to say and will be the backbone of the internet. If you haven’t reached that conclusion yet, then you’re better off doing research until you do. Eventually, with enough googling, you’ll see the cold hard facts: crypto is taking over every industry. The total value of crypto is now more than $2 trillion and increasing.
Once you believe in the future of crypto, it’s easier to invest and not panic when the inevitable crash comes.
Crypto crashes are a feature not a bug
Even now that crypto has matured, a crash in price is a given. It’s not unusual to wake up and have half of your crypto drop by 50%. You could argue this is bad. Here’s why it’s not: after every major crash in crypto the price has skyrocketed after the event.
Volatility is necessary for high growth. You can’t have one without the other.
If you can survive the huge drops, you get to participate in the 200%+ year-on-year gains. This is harder than it sounds. My psychology has been reprogrammed by crypto. When I only invested in stocks a 10% drop in price would make me want to sell. After the crypto crash of 2018, 50% drops do nothing to me, because I know what follows.
Focus on the proven cryptos
People investing in unknown cryptos is one of the biggest mistakes I saw in the 2018 crash. Many of the popular cryptos back then have never recovered. That’s why I recommend people stick with proven cryptos like Bitcoin and Ethereum. You won’t make 1000x your money, but you should do well based on historical prices and the current uptake.
The need for 1000x gains is the result of greed. Stocks in an index fund that went up 7% per year used to make people happy. Then crypto came along and people’s expectations got way out of control.
“Why don’t you stake your Ethereum and make 8% interest?” a friend asked me the other day. It’s a great question.
I don’t get interest on any of my cryptos because it adds risk. Ethereum is up 360% this year and Bitcoin is up over 60%. I’ve already made huge gains so what’s the point of 368% gains? It doesn’t make sense to me. Greed can cause us to make terrible decisions and take on ludicrous risk.
Choosing what cryptos to invest in is a difficult decision. If you want to stay with the proven cryptos then stick to the top ten largest coins. (You can find the list on CoinGecko.)
Network effects help you see winners from losers
The way to get stuck in the next inevitable crypto crash is to invest in cryptos that have little to no network effects.
Network effects are simply the rate at which new users are joining the network. If the price of a crypto is going up but hardly anyone is joining the network, then you’re simply gambling. Yes, people can join later on. But are you a venture capitalist/startup investor, or a regular investor? I’m a regular Joe so I stay away from anything early stage.
Ethereum is growing faster than the internet did in the early days.
Right now there are approximately 757,859 active Ethereum addresses (accounts). Pretty soon Ethereum will have more than 1 billion accounts, although some people may have multiple accounts so it doesn’t reflect exactly the number of users. It’s unlikely that a network with that many users, growing that fast, will fail. They’re the cryptos that recover the best when a crash occurs.
Nothing beats research
In 2018 I did barely any research. I simply listened to what my mates by the water cooler were saying, and the random comments of any Twitter users. The people who misguided me the most were the IT staff at my employer. They made it sound like they knew the technical architecture of each new crypto. Realistically they had no idea.
I now know to do my own research. Here’s my criteria you can copy:
- How many developers are working on the crypto project?
- What use cases do they have?
- When do they launch their first release or next big release?
- What problem do they say they solve? What problem (if any) do they actually solve?
- How old is the crypto project?
- Who are the founders? Who are the trusted investors (if any)?
- What do the users think who have used the crypto?
- Is the functionality easy for dummies like me to use?
- Have I personally used the crypto? If so, what are my thoughts?
Secondhand opinions are the worst. Your own research gives you confidence in the cryptos you’ve invested in. You’ll need that confidence when the next inevitable crash comes out of nowhere.
Beware of the hype machine
Dudes on Twitter display charts every day. These charts are supposed to tell you what the price of any crypto will do. It’s all bollocks.
No one can predict where the price of any cryptocurrency will be in the short term. Read that again.
Yes, psychology drives crypto. But all it takes is one whale of an investor to come on board, or leave, and all the predictions turn to dust. Charts of prices are designed to hype you up. More people want you to invest money in the crypto market because it helps raise the price of their own investments.
Hype is dangerous if you buy at the height of the euphoria. Then when the crash comes, you’re caught with cryptos that have plummeted. Some, like me, can hold on. You may not be able to. You may need to withdraw money you invested in crypto because of a random life event you couldn’t foresee.
When you buy high and get forced to withdraw your money during or after the crash, the losses become enormous.
A longer time horizon is where the money can be made
Another huge problem in crypto is people have crazy expectations to make a profit. The ones who make money in crypto invest for 2+ years (typically 5 years). This comes back to research.
When you know what you’ve bought and understand blockchain is here to stay, there’s no reason to buy and sell crypto short-term. Most cryptocurrencies traders lose money. They’re simply gambling and don’t know it. Invest for the long-term, or not at all. This applies to stocks too.
My rule: Invest money in crypto you can afford to lose.
Lack of regulation is a huge risk
Crypto has a lot more regulation than the 2018 crash. It’s still dead easy though for scams to emerge. The most common scam in finance is a ponzi-scheme. In a ponzi-scheme, early investors make money from investors who get in later. Withdrawing your money is typically difficult, which is the first sign to be wary of.
Crypto is no different from traditional finance. A crypto project called “Hex” is the best example I’ve seen. Safemoon is another scam. There have been plenty of other frauds in the past like Bitconnect. The US seeks to further regulate crypto in the coming months.
The doomsdayers say US regulation will destroy crypto. Commonsense says regulation will reduce scams and make it safer for banks, institutions and fintechs like Stripe to enter the space.
The crash can be the best time to buy more
Some people see a crypto crash as a bad thing. Because I have enough data that shows me blockchain is here to stay, when a crash happens, I simply buy more Ethereum and Bitcoin (and sometimes some smaller coins). A crypto crash can be another name for discounts. It depends on whether you’ve looked back at the 13-year crypto history or not.
Experts agree on the next crypto crash
The consensus among the big players in the crypto space is that the next crash for crypto will be some time in 2022. The second version of Ethereum launches in roughly March next year. Sometime after that we’re likely to see a crash. This is when our collective greed is reset.
After the crash will be a prolonged bear market of typically 1–2 years. It’s during this time that crypto investors are tested. If you got in for the get-rich-quick scheme, you’ll likely be wiped out by the crash and forced to sell. If you got in for the long-term technological change, then you’ll likely be patient and wait for the next bull market when prices go back up again, slowly.
I learned from the 2018 crash that if I’m patient and don’t fear crashes, I can make decent money over the long term. The fact I survived the last crash is why I’ve done so well in crypto overall.
Expect a crypto crash as they’re a given in all financial markets.
Have a plan for when prices drop by 50% or more. Study blockchain technology so you can develop long-term conviction. Focus on Bitcoin and Ethereum. Do your own deep research to give you confidence in cryptos you may want to invest in. Be patient.
When the hype and greed reach high levels, you’re likely not far from the crash. The Warren Buffet Rule applies to crypto too: Be fearful when others are greedy and greedy when others are fearful (like in a crash).
This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.