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What Did We Learn From The 2022 Crypto Crash?

The Crypto world has displayed high volatility and continues to do so. The current 2022 crash of Bitcoin and TerraUSD losing 50% of its value within six months has reminded investors to be cautious. It was volatility that had genuine human consequences.

For example, a Massachusetts surgeon invested 90% of family savings in TerraUSD, which dived significantly. He is now concerned about paying his child’s college fees as he is totally wiped out. He had invested in stablecoin because of its low-risk claim. People invest in cryptocurrencies for several reasons and in several ways.

Several common reasons people invest in crypto.

  • With the hope that the price will shoot high and they can earn significant wealth.
  • With a belief that crypto will serve as an inflation hedge against poor fiat economic policy.
  • Crypto is believed to store value like digital gold, especially stablecoins as they are less volatile.
  • The concept of bypassing regulatory financial institutions is adored because crypto is a decentralized form of digital currency.
  • Some enthusiasts feel thrilled to participate in a new technological revolution.
  • Many investors hope the movement of crypto rates to move differently than the stock market. It gives them a chance for portfolio diversification.
  • Some people prefer to earn passive income in loaning crypto and earn high returns from DeFi market.

Significant risks of owning crypto

  • High volatility increases the chances to lose more value in a short time.
  • Increases the risks of cyber theft and hacking of your digital wallets. So make sure that the crypto wallet app you chose is robust like ZenGo X.
  • Many adore the decentralization concept but if something goes haywire you cannot approach anyone for help.
  • As the blockchain works on a peer-to-peer network, you handle people directly. This increases the chance of mistakes, fraud, and negligence.
  • The government approach to cryptocurrency differs and even there are concerns about taxation policies and their impact on the earnings.

Lessons learned from recent crypto crashes

In a couple of years, Bitcoin and several other cryptos experienced a massive crash. Bitcoin went spiraling from $8,000 to $60,000 within a year and dropped from$60,000 to $30,000 in the subsequent year. TerraUSD fell drastically and the chances of recovering are negligible. It means permanent capital loss.

The lessons for new or seasoned crypto investors –

  • Different coins reveal diverse risk profiles. From the above example – unlike a stable coin that is supported by cash, TerraUSD uses algorithmic stablecoins, which applies a formula to keep its peg with the US dollar.
  • Crypto is a dicey investment because you cannot predict the coin price. The price to sell depends on public sentiments instead of business fundamentals.
  • As price is speculative it is hard to identify coin value. Without knowing coin value, you can get caught in a poor investment. For example, in 2021 Bitcoin was bought at $60000 with an assumption that it was progressing towards $100, 000.
  • Speculation resembles gambling rather than investing. You should do your homework before choosing a coin. Never invest more than you can afford.

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