This year-end review takes a look at 5 valuable lessons from the cryptocurrency market in 2018, a year filled with mixed emotions!
2018 has been a memorable year for the cryptocurrency market, with many talking points throughout the year. Granted, 2018 has been characterized as a tumultuous year due to the devastating market crash that saw cryptocurrency prices losing more than 80% of their value. Perhaps the best indicator of the cryptocurrency market is Bitcoin, which represents the first and largest decentralized cryptocurrency according to market capitalization. From a historic high of close to $20,000, Bitcoin’s price – as well as the price of all coins and tokens – took a deep plunge since the start of the year.
Here’s a chart for Bitcoin’s prices in 2018:
Due to the intensity of the crash, many theorized that the cryptocurrency ‘bubble’ has popped or worse, that cryptocurrencies are headed towards extinction. However, this article will take a look at the positive outcomes that can be extracted throughout this tragic year.
With every setback, there are always lessons to be learnt.
Let’s explore five valuable lessons from the cryptocurrency market in 2018.
Lesson #1: The Market is Crazy
The cryptocurrency market is extremely erratic and volatile. The entire industry isn’t regulated, thereby creating a hotbed for scams, ponzi schemes and ‘money-grab’ projects. Adding to the mix, it is common knowledge for cryptocurrency exchanges to engage in the manipulation of market prices and trade volume. And yes, the market is abundant with illegal activities that you wouldn’t normally get away in traditional investment markets. Insider trading, money-laundering and pump & dumps involving cryptocurrencies are a norm.
No one can deny the revolutionary nature of blockchain technology, but the negative elements that entails the cryptocurrency market – as mentioned above – can be crazy to consider. The worrying part is that anyone can participate in the markets since there is little safeguards. This means that the average Joe with no investing knowledge or even an understanding in the technology can dabble in cryptocurrencies and possibly gamble their life-savings away. We can learn a thing or two from Harold, pictured below:
(Read more: Dangers in Cryptocurrency Investing)
Lesson #2: Nobody Can Predict The Markets
The infancy of the technology coupled with the extreme volatility of the market makes it close to impossible for anyone to predict where prices will be in any time frame. This shouldn’t come as a surprise since the traditional models to value assets and make any credible predictions on its valuations do not apply to cryptocurrencies. Why? Because cryptocurrency projects are not regulated and therefore would most likely not have any financial statements in the form or cashflow records, balance sheets and profit & loss (P&L) statements. Without the traditional financial metrics, it is hard to fundamentally assess and quantify the real value of cryptocurrencies. Anyone can come up with a prediction of Bitcoin’s prices for tomorrow or even next year, but there won’t be any credibility without a quantifiable and proven metrics that substantiates the claims.
The market is constantly filled with experts and gurus that have given predictions. Almost all of the predictions completely miss the mark, no matter if they were slightly conservative or outright ambitious. Take a look at John Mcafee, the cybersecurity guru that cuts a polarizing figure in the cryptocurrency world. He predicted that Bitcoin would reach a price of $1 million by 2020.
Some of these predictions are controversial in nature and hold little to no predictive value. Even Wall Street’s most prominent Bitcoin forecaster – Tom Lee – has given up predicting Bitcoin’s prices after many failed predictions throughout 2018. He wrote to his clients:
“We are tired of people asking us about target prices…Because of the inherent volatility in crypto, we will cease to provide any timeframes for the realization of fair value.”
That basically sums up the unfortunate state of price predictions in the cryptocurrency market.
(See more: Crypto ICO vs. Stock IPO: What’s the Difference?)
Lesson #3: High Risk, High Returns
Traditional financial theory states that the potential returns that one can expect from their investments is directly correlated to the level of risk an asset possess. In other words, higher risks equates to potentially higher returns.
It is apparent that cryptocurrencies are the most riskiest investment that you can make due to the relative infancy of the technology, the absence of regulations and the extreme price fluctuations. Additionally, it is not surprising to hear of cryptocurrency exchanges manipulating prices in the market.
Let’s take a look at the fluctuations of cryptocurrency’s market capitalization to get a sense of their volatility:
Growing over 4,700% in 2017 and thereafter shrinking in value by more than 75% the next year truly makes cryptocurrencies a highly instable investment. A market as risky as the cryptocurrency market is a double-edged sword; you can make a tremendous amount of money but you could also lose everything. The market crash of 2018 is testament to the volatile nature of cryptocurrencies and represents a vital lesson to anyone wanting to enter the markets. You have to be prepared of the risks you’re facing when investing in cryptocurrencies. Thorough due diligence and a basic understanding of cryptocurrencies is an important step in your investment process.
Lesson #4: Most Projects Will Fail
The glory days of cryptocurrency projects raising hundreds and millions of dollars through Initial Coin Offerings (ICOs) is over and we can observe its aftermath. A study reports that close to 50% of token projects are inactive into their 5th month or beyond. It was even worse for projects that do not report their capital and aren’t listed on any exchanges, with over 83% being inactive after 4 months. That is staggering numbers for the general ICO market. Here are the reasons for ICO failures:
(Source: Data Driven Investors)
These numbers are testament to the hype and craze that gripped the ICO market, without any real substance or viability behind ICO projects. It’s easy to fall into the ICO hype in 2017, given that the average returns for ICO tokens in 2017 were in excess of 1,320%! However, the 2018 bear market led to the destruction of the prices of all tokens from ICO projects. A majority of these newly-released coins even went under their initial ICO price. Not surprisingly, many lost a tremendous amount of wealth in the ICO market. It is a painful lesson to learn that the unregulated nature of cryptocurrencies in ICOs require everyone to engage in rigorous due diligence before investing in any project.
Lesson #5: Managing Risks is Key
In a highly risky market, it is vital that you know how to manage your risks well. Managing your risks entails taking the appropriate measures to reduce the potential for losses in your investments and maximize your profit potential. Here are ways to effectively manage your risks:
- Diversification: Don’t invest all of your net worth in cryptocurrencies. That is akin to suicide. Make it a point to learn about other forms of investments such as stocks, commodities and real estate. Different forms of asset classes are associated with varying levels of risk; if you’re a risk-adverse person, then your investment portfolio will include mainly of investments that are on the safe side, with a small portion into high-risk assets such as cryptocurrencies. Even in your cryptocurrency portfolio, make it a point to diversify your investments across different categories of coins and assets, such as:
- Base Currencies: Base currencies represent the most common cryptocurrencies against which all of the other coins and tokens are quoted in. They are the largest coins in terms of trading volume. Bitcoin (BTC) and Ethereum (ETH) are the common base currencies.
- Stablecoins: Coins that are pegged to stable assets such as Gold and USD. Stablecoins are important to have since they provide stability in the volatile cryptocurrency environment.
- Interest-Bearing Coins: Coins that provide ‘dividends’ or a fixed rate of return in exchange for staking your coins in a digital wallet. This arrangement is similar to your bank account, where you’ll earn a rate of return on your cash deposit. Interest-bearing coins are powered by the Proof-of-Stake (POS) consensus mechanism.
- Cash: Always make sure to hold a portion of your cryptocurrency portfolio in cash to act as a buffer. You wouldn’t know when you need to cash out for living expenses or when you simply when to re-enter the market if cryptocurrency prices are looking cheap.
- Take Your Profits: Perhaps one of the key decisions that you must execute is to actualize your profits from time to time. If prices of cryptocurrencies get high, don’t be afraid to take your profits or ‘cash-out’. This gets extremely tough when prices are soaring and people will psychologically assume that prices would go on climbing forever. It won’t. That’s why its smart to take some profits off the table when prices start to soar. It doesn’t mean that you sell away or liquidate all your coins, but a portion of it. Having excess cash is always a good thing.
- Stop-Loss: A stop-loss is a mechanism that automatically sells away a coin once it reaches a certain price point, designed to limit an investor’s losses when the price of a coin goes down or to protect the investor’s profit if prices are above a certain price target. Having a stop-loss is a vital part of protecting your investment from the adverse and sudden fluctuation of prices.
All in All
Cryptocurrencies have come a long way since the creation of Bitcoin back in 2008. From a single, revolutionary coin that had the potential to disrupt the traditional monetary system to a vibrant ecosystem of more than 2,000 coins and tokens that are created to solve a wide-range of problems. The innovation and developments at the heart of blockchain technology could disrupt many traditional systems and applications. However, there are many challenges that come along with it. The absence of regulation and the infancy of the market has created a dangerous environment for the masses. We can only hope that in due time, the expansion of the market moves in the right direction.
(You might also be interested in: Cryptocurrency Guides: Comprehensive List of Crypto Guides For Beginners)
Beneficial Resources To Get You Started
If you’re starting your journey into the complex world of cryptocurrencies, here’s a list of useful resources and guides that will get you on your way:
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