Lessons Learned in a Crypto Crash

The crypto crash of the last week has been so spectacular it would make any bear blush. After the Federal Reserve announced an interest rate hike of 0.50% both traditional and crypto markets rallied before being relentlessly pummeled down again. The crypto market has since capitulated to summer 2021 lows. While current market sentiment is apocalyptic, the game is not over yet. A crypto crash is a terrific opportunity to learn how we can better position ourselves for success in the future. Here are a few lessons that I learned over this past week.

Be greedy when others are fearful… but don’t ignore the signals

The price of Bitcoin fell below the 50 week simple moving average (SMA) and then crossed the 100 week SMA. Historically, when that happen it then falls to the 200 week SMA. If this trend holds the price of BTC would end up in the low $20,000s. This would likely have a catastrophic effect on the price of most cryptocurrencies. Of course, no one knows for sure what will happen but it can’t hurt to consider the potential downside risk.

Benjamin Cowen: Tips for Navigating The Bear Market

Benjamin Cowen had a great update on his YouTube channel for navigating bear markets. In his usual analytical and unemotional way, he recounted his past experiences during bear markets and shared some tips for working through them. Although it can pay to be greedy when others are fearful, this is most applicable during a bull market or at the bottom of a bear market. If you are constantly buying the dip on the way down, you will not have any capital for the final capitulation when “prices are lower than you ever imagined”.

From Cowen’s perspective, the current trend is still negative and with the current macro environment it doesn’t look like it will turn anytime soon. Whilst sentiment is low, the one thing that can make it tolerable is recognizing you are in a bear market. Here are some key tips that Cowen shared with the audience:

  • Cash is king – if you can preserve your capital, you will put yourself in a better position to take advantage of the lower prices.
  • Alts are risky – unfortunately in a risk off environment, alt coins are usually hit much harder than blue chip cryptos like BTC or ETH. 
  • Don’t fight the Fed – the Fed doesn’t care about your investment portfolio and with the interest rates on the rise, buying power (demand) is being removed from the markets. It could be wise to reduce your exposure until things turn around.

Remember: Bull markets can make you money, bear markets can make you rich.

Are you over-leveraged?

Some investors have been depositing tokens in lending protocols such as Scream or the Granary to borrow other assets (ie. stablecoins). They then buy additional crypto with this loan, leveraging up their position in the hope the market goes the right way. If the market goes the wrong way, these investors risk being liquidated. They must unwind their loans or add additional collateral to stay solvent. Unfortunately, during these grueling down turns the Fantom network gets smashed with transactions as everyone desperately scrambles to unwind their loans and arbitrage bots work overtime. This congestion leads to insanely inflated gas prices (over 10,000 gwei), long transaction times and sometimes even failed transactions. When you are fighting against the clock to prevent yourself from being liquidated, this is a nightmare. If you are using leverage, did you factor in high gas costs and network congestion into your exit plan? Or did you wait until it was too late?

Not all tokens will survive

Top 15 Cryptocurrencies by Market Capitalization 2013-2021

As we enter a crypto crash, I am reminded of the sad truth that many crypto tokens do not survive the bear market. Looking at this video of the top 15 cryptocurrencies by market cap over time, you see that it is an ever rotating cast with many making a brief appearance before disappearing into obscurity. It is easy to become deaf to the risks whilst you are swaddled in the echo chamber for your favorite project. Of course, the potential upside is immense but perhaps don’t go all in because the downside is very real. As I write this article, the price of Terra’s LUNA is falling to levels that a week ago most people thought were unimaginable. Do not become emotionally attached to your internet money, don’t “marry your bags” and know when to sell.

How stable are your stablecoins?

And speaking of Terra, this week will most likely be remembered for the dramatic failure of the UST peg. Bebis has been very vocal on Fantom Unchained about the risks of using certain algorithmic stable coins. This latest de-pegging will shake the markets confidence in most, if not all of them. If you are holding stablecoins, do you know if they are under-collateralized? And what about the quality of the collateralization? Not all stablecoins are created equally. Just because it is a stablecoin, it doesn’t mean it is safe.

Sleep Adjusted Returns

Taiki Maeda often mentions on his YouTube channel that he is looking to improve his “sleep adjusted returns”. This means that for his investments, he factors in the cost of time and stress that he would incur when seeking out higher returns. Perhaps all the extra time and effort put in to squeeze the last few APRs are not worth the long nights and nightmares of liquidation. If you can simplify your portfolio, you may be able to make better decisions and free up your precious time. There is so much more to life than just crypto so don’t neglect the other important aspects of your life. Regularly invest in yourself through learning and reading, look after your health with diet, exercise and sleep and make time to deepen your connections with family and friends. 

So what have you learned from this Crypto Crash? How will you position yourself for success? We’d love to hear from you in our Discord or on Twitter. Don’t leave this space as those that stick around will have the best opportunities at setting themselves up for the future. Stay safe.

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