Cryptocurrencies have had a wild ride in 2022. Numerous unforeseen occurrences have occurred, and the history of cryptocurrency has changed drastically in recent years. For instance, popular cryptocurrencies like Bitcoin and Etherum have since fallen by more than 60%.
In May, we saw the collapse and depegging of Terra/UST. This was then followed by Celsius and 3AC Capital’s failure in June. The recent collapse of FTX and Alameda was one of the biggest surprises that occurred in November, shocking many people. For the past 2 years, FTX has grown to become one of the largest centralized exchanges. As a result, this FTX collapse has undoubtedly impacted investors’ faith in cryptocurrencies. Comparing centralized exchanges to other risky cryptocurrency initiatives, they have always been seen as relatively safer investments.
It’s been a wild week for crypto, but this is just another interesting part of its 4.5-year long story. It just goes to show you how volatile and unpredictable the space can be. Many people may often dismiss the innovations made possible by cryptocurrencies and label it as a Ponzi scheme. However, rather than dwelling on the current situation, it’s important to learn and prepare for what comes next.
Below are some of the key lessons we have learned based on our own and friends’ experiences.
Crypto Lessons #1: Brokerages/Exchanges are different from Banks
The business models of stock brokerage and cryptocurrency exchanges are remarkably similar. They are involved in the transaction between a buyer and a seller through facilitation, negotiation, or arbitration. Their business models involve connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Banks, on the other hand, operate under a completely different business model. They mostly get their capital from deposits and create credit facilities for their retail and business customers. Thus, cryptocurrency exchanges are often regarded as the custodian of users’ funds. Never should they be permitted to utilize a user’s money without that user’s consent.
This is what FTX allegedly did incorrectly, using customer cash to support its high-risk trading activity in Alameda without authorization. This sparked a wave of withdrawals as a result of customers and investors becoming suspicious. As a result, FTX had to stop accepting withdrawals due to a liquidity crisis. This left many of its clients and investors in a precarious situation.
Crypto Lessons #2: Speed is Everything in Crypto
As someone who’s been involved in the cryptocurrency space for sometime now, I can tell you that speed is everything. If you suspect something is wrong with a particular coin or project, withdraw your money immediately.
Always stay up to date on the latest news and developments in the crypto space, as things can change very quickly. By being proactive and keeping informed, you can help protect yourself from potential scams and losses. This was the case with the recent UST Depegging and FTX Collapse. Both of these events happened relatively quickly and caught many people off guard. If you had mindlessly trusted the stories of these projects, then you probably were affected financially by the events.
Never blindly trust anyone in this space even if they seem trustworthy. In the world of crypto, things can change very quickly. It’s important to always be on the lookout for potential scams or red flags. Always do your own research before investing. If you take your time and do your research, you’ll be much better off in the long run.
Crypto Lessons #3: Not your Keys, Not your Coins
The golden rule in the crypto industry is “Not your keys, not your coins.”
This means that if you don’t have control over your private keys, you don’t have control over your coins. This is an important rule to follow. When you entrust someone else with your coins, you are essentially giving up control over them. If the person who holds your keys loses or fails to secure them, your coins could be lost or stolen. For these reasons, it’s important to always keep control of your own keys and never give them to anyone else.
Hence letting exchanges manage and handle your cryptocurrencies may not be the wisest thing to do. There is still a chance for mismanagement in the cryptocurrency sector due to the lack of exchange transparency. This is seen in the case of FTX.
Hence, many users prefer using hardware wallets to store their cryptocurrency. The Ledger, Trezor, and many other well-known wallets are just a few examples. Remember to only purchase these hardware wallets from authorized retailers or resellers.
Crypto Lesson #4: Never put all your money in one exchange
In recent years, some crypto exchanges have come and gone, while others have become household names. No matter which exchanges you use, it’s important to remember one key rule. “Never put all your money in one exchange”.
There are a few reasons for this. First, exchanges are constantly hacked, and even the most reputable ones have had major security breaches in the past. For instance, Binance had also experienced a significant hack in May 2019 losing over 7000 BTC. Imagine having all your money stored on an exchange that gets hacked, you could lose everything.
Second, exchanges can and do go out of business. If an exchange goes under and takes your money with it, you could be left with nothing. So how can you protect yourself? Apart from storing your cryptocurrencies in hardware wallets, the alternative is to diversify your holdings across multiple exchanges. That way, if one exchange goes down, you still have access to your other assets. You can also spread your risk by using different types of exchanges. Some that focus on security while others that are known for their lower fees.
By diversifying both where you store your money and what type of exchange you use, you can minimize your risk. This will also give one more assurance in the volatile world of cryptocurrency trading.
Crypto Lesson #5: Regulations are key for the growth of Crypto
In traditional finance, regulators have imposed numerous safety nets in traditional stock broking to safeguard investor funds. The regulations work to protect clients in the event of a brokerage failure and reduce the possibility of a complete collapse. For example, in the US, there is a “Customer Protection Rule” which is mandatory for all brokerage firms to abide with. This rule requires brokerages to maintain client funds separate from the firm’s assets to avoid any misuse.
However, in the case of cryptocurrency, this is not entirely clear. What actually happens if an exchange fails?
While there has been some progress made in terms of clarity around regulations. More crypto exchanges are now open to sharing their Merkle tree proof of reserves. There is still a long way to go. In particular, more clarity is needed around how existing securities laws apply to crypto assets. Once this is sorted out, it will go a long way in boosting confidence in the space and driving further adoption. After all, institutional investors are likely to have more confidence in a market that is well-regulated and transparent.
2022 was a wild year for the crypto world, and we’ve learned a lot of lessons along the way. From the importance of security to the need for regulations, here are 5 key lessons that we’ve learned. Hopefully, these lessons will help us navigate the bumps and bruises of 2023 and beyond. Thank you for reading and good luck in your crypto journey!
Disclaimer: The information provided by LearnToInvest serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. All views expressed in the article are the independent opinions of Learn To Invest.