As we approach the new year, it’s helpful to look back to 2022 in crypto and learn from the mistakes made in the industry. It will be remembered as the year when a series of major projects imploded, each of which faltered the market.
It was also the year when cryptocurrency prices went to hell, investor confidence plummeted, and some of the project’s founders ended up in legal hot water.
All these factors have led the cryptosphere to ignite with discussions about what last year’s misfortunes portend for the future. Crypto adherents remember how even some malicious events like The DAO and Mt.Gox completely shook the industry and everyone wondered if it would recover, which it did.
If we take stock of last year’s mistakes, we will have the opportunity to avoid repeating the same mistakes in the future.
#1. The contagion is real
In cryptocurrencies, a contagion effect is when a project fails and the effect is felt in the entire market. No year has been more clearly demonstrated than in 2022, with the collapse of Earth (LUNA) in May triggering a chain reaction from which the industry is still recovering in early 2023.
The fall of Earth and the ensuing contagion was so far-reaching that up to $500 billion in value was wiped out of the market.
Some companies that have been direct victims of Earth’s collapse include Celsius, Three Arrows Capital (3AC) and Voyager Digital. The latter two companies had to go bankrupt after TerraUSD, which they held in significant amounts, collapsed. Their problems have been compounded by the free fall in market prices that have further drained their coffers.
The closure of FTX in November would trigger more contagion. BlockFi, a cryptocurrency lender, filed for bankruptcy due to “significant exposure” to the exchange. Hong Kong-based exchange AAX has also gone belly-up. Other forms of contagion included platforms that blocked withdrawals, including Genesis and cryptocurrency lender SALT.
#2. No crypto project is too big to fail
Not even the FTX or the Earth (MOON) that seemed bigger than life only for both to eventually collapse.
FTX seemed too big to fail due to its consistent positioning in the top five exchanges and its market valuation. At its peak, FTX was valued at $32 billion, with founder Sam Bankman-Fried having a net worth of $26.5 billion. After filing for bankruptcy, the former exchange is now worth zero and up to the neck in debt.
The rapid unraveling of the Earth ecosystem (LUNA) in May had already shown that even large projects are not immune to failure. Its beginning of the end came after the platform’s TerraUSD stablecoin algorithmic mechanics became unsustainable and crashed under the weight of a massive selloff, dropping from $1 to cents in a week. Its native token, Luna, also plummeted 99% over the same period.
At its peak, TerraUSD was worth $18 billion and firmly in the top ten in the market ranking.
The lesson is that the cryptocurrency market is still in its infancy and even the biggest players have legitimate risks thanks to the extreme volatility of the space.
#3. Due diligence is not antiquated
In the absolutely crazy world of crypto investing, good old due diligence will never go out of style. It will save you heartache when chips fall off (and they often do).
Remember, unlike its balanced traditional counterpart, decentralized finance is defined by crazy price swings and flashy new financial products that any new company can claim to offer.
Because of this largely unmonitored and laissez-faire environment, cryptocurrency investors often have little to no recourse in case they lose money. This means, as 2022 has shown, that you need to educate yourself before you put your hard-earned money anywhere.
Some ways you can do this:
- Project research: Check everything about the company’s social media activity, from founders’ credentials to their level of transparency to what others say about it on social media forums to the competition. If something feels outside, it probably is.
- Don’t leave your money on centralized exchanges (CEX) and DeFi platforms: For example, thousands of customers’ money is frozen in FTX after the exchange has failed. DeFi’s failures, including Celsius and Voyager Digital, also led to the freezing of client funds. It is not obvious whether customers will eventually get this money back or how long it will take. Another danger of these platforms is that they can be hacked. Last year earned notoriety as “the biggest year for crypto hacking,” with over 100 protocol breaches and over $2.5 billion embezzled. Take charge of your money by storing it in a hardware wallet.
- Use a hardware wallet for long-term storage: It is advisable to transfer your cryptocurrency to an exchange only when you want to trade. The rest of the time, consider storing your money in a hardware wallet. A hardware wallet is more secure than an online wallet because it is immune to internet vulnerabilities like hacks and malware. The mantra “not your keys, not your coins” comes into play.
Hoping for the best, preparing for the worst
Savvy investors know that in the unpredictable world of cryptocurrencies, you hope for the best and prepare for the worst. This approach achieves a delicate balance in the slope of the knife which can be profitability and loss of cryptocurrencies.
Hoping for the best and preparing for the worst means putting money you can afford to lose.
For example, last year’s market upheavals left many crypto investors in the cold, with stories of people pouring all their savings into cryptocurrency only to be locked out of them.
Preparing for the worst means that however the market winds blow, you win. Find a way to position yourself in the market where you will make money, not lose money or suffer an acceptable loss.
The Bottom Line: Lessons Must Be Learned
Operators in the sector must take stock of last year and apply these lessons for the future. The health of the ecosystem depends on it.
Crypto is a space that is still clamoring for mainstream acceptance and doesn’t have the luxury of repeating mistakes.