The Importance of Long-Term Belief

In 2018, Bitcoin, the leading cryptocurrency, saw a staggering drop of over 80%. Shortly thereafter, Ethereum, the second-largest, also declined sharply.

During that year, there was uncertainty surrounding potential bans on cryptocurrency. The market was significantly affected by China's prohibition on crypto, leading many to speculate that countries like the U.S. would follow suit. At that time, the applications for crypto were limited. It primarily served startups seeking funding through Initial Coin Offerings (ICOs), which enabled anyone to create a coin, make grand promises, and secure investments. This resulted in rampant speculation.

I realized that investing in crypto only makes sense if you firmly believe that blockchain technology is here to stay and will become integral to the internet. If you haven’t come to this conclusion, it would be wise to conduct further research until you do. With enough investigation, you’ll discover undeniable evidence: cryptocurrencies are infiltrating every sector, now boasting a total market value exceeding $2 trillion.

Once you are convinced of crypto's future, investing becomes easier, and the inevitable crashes won’t trigger panic.

Embracing the Inevitable Crashes

Even in a more mature crypto market, price crashes are a certainty. It’s not uncommon to wake up and find that half your crypto has dropped by 50%. While this may seem detrimental, it’s actually not: after each significant crash in crypto, prices have typically surged afterward.

Volatility is essential for substantial growth; you cannot have one without the other.

If you can endure these steep declines, you can also benefit from the 200%+ annual returns. However, this is more challenging than it appears. My mindset has adapted to the crypto environment. When I only invested in stocks, a 10% drop would prompt me to sell. However, after experiencing the 2018 crash, I’ve learned that 50% declines don’t faze me because I understand what usually follows.

Stick to Established Cryptocurrencies

One of the most significant mistakes I witnessed during the 2018 crash was people investing in unknown cryptocurrencies. Many of the trending coins back then have yet to recover. Therefore, I suggest focusing on established cryptocurrencies like Bitcoin and Ethereum. While you may not achieve 1000x returns, historical performance and current trends indicate steady growth.

The desire for astronomical gains stems from greed. Previously, a 7% annual increase in index funds satisfied many investors. However, the advent of cryptocurrencies skewed expectations.

“Why don’t you stake your Ethereum for 8% interest?” a friend recently asked.

That’s a valid inquiry.

I don’t earn interest on my cryptocurrencies because it introduces additional risk. Ethereum has appreciated 360% this year, and Bitcoin has increased over 60%. I’ve already realized significant gains, so chasing an additional 368% doesn’t appeal to me. Greed can lead to poor choices and excessive risk-taking.

Cheat Sheet for Cryptocurrency Investment

Selecting which cryptocurrencies to invest in can be challenging. If you prefer to stay with established options, focus on the top ten largest coins (available on CoinGecko).

Identifying Winners through Network Effects

To avoid getting caught in the next crypto crash, steer clear of cryptocurrencies that lack strong network effects.

Network effects refer to the rate of new users joining a network. If a cryptocurrency's price is rising, but user growth is stagnating, you're essentially gambling. Yes, new users may come later, but are you a venture capitalist or an everyday investor? I consider myself an average investor, so I avoid early-stage ventures.

Ethereum, for instance, is expanding at a rate faster than the early internet.

Currently, there are approximately 757,859 active Ethereum accounts. Soon, that number will surpass 1 billion, though some users may hold multiple accounts. It’s unlikely that a network with such rapid growth and a large user base will fail. These are the cryptocurrencies that rebound best after a market crash.

The Value of Thorough Research

In 2018, I conducted minimal research. I relied heavily on what my colleagues said and random Twitter comments. The most misleading advice came from my company's IT staff, who claimed to understand the intricacies of each new cryptocurrency. In truth, they were just as uninformed.

I’ve since learned the importance of conducting my own research. Here’s a checklist you can use:

• How many developers are involved in the crypto project?
• What are its use cases?
• When is their next major release scheduled?
• What problems do they claim to address? What problems do they actually solve?
• How long has the project existed?
• Who are the founders? Are there any reputable investors?
• What do actual users say about the cryptocurrency?
• Is the functionality user-friendly for novices?
• Have I personally used the cryptocurrency, and what are my thoughts?

Relying on secondhand opinions is risky. Doing your own research instills confidence in your investment choices, which is essential when the next unexpected crash occurs.

Watch Out for Hype

Many individuals on Twitter share charts daily, claiming they predict cryptocurrency prices. This is largely misleading.

No one can accurately forecast cryptocurrency prices in the short term.

Yes, market psychology does influence cryptocurrency, but just one large investor's actions can render predictions meaningless. Price charts often serve to generate hype, encouraging more people to invest to elevate the value of their own holdings.

Hype becomes dangerous when you buy at the peak of excitement. When the inevitable crash happens, you could find yourself holding depreciated assets. While some, like myself, can endure the downturn, others may not have that luxury and might need to cash out due to unforeseen circumstances.

Investing at a peak and then being forced to withdraw during a crash can lead to significant losses.

Long-Term Investment Yields Returns

A common issue in the crypto world is inflated profit expectations. Those who succeed in cryptocurrency typically invest for two years or more, often five years or longer. This ties back to the importance of research.

When you understand your investments and recognize that blockchain is here to stay, there’s little reason to engage in short-term trading. Most cryptocurrency traders end up losing money; they are often unaware that they are gambling. Invest with a long-term perspective, or don’t invest at all. This principle applies to stocks as well.

My guideline: Only invest money in crypto that you can afford to lose.

Regulatory Risks in Cryptocurrency

The cryptocurrency landscape has seen increased regulation since the 2018 crash. However, scams remain prevalent. The most common financial fraud is the Ponzi scheme, where early investors profit from the contributions of later investors. If you find it difficult to withdraw your funds, that’s a major red flag.

Cryptocurrency is just as vulnerable to fraud as traditional finance. Projects like “Hex” and “Safemoon” serve as prime examples of scams. The U.S. government is expected to impose further regulations on cryptocurrency in the coming months.

Critics argue that U.S. regulation could stifle the crypto market. However, common sense suggests that regulation can minimize scams, making it safer for banks, institutions, and fintech companies to participate in this space.

Viewing Crashes as Buying Opportunities

While some perceive a cryptocurrency crash as detrimental, I see it as an opportunity. With ample evidence indicating that blockchain technology is here to stay, I tend to purchase more Ethereum and Bitcoin (and occasionally smaller coins) during downturns. A crypto crash could be viewed as a discount. It all depends on whether you’ve reflected on the 13-year history of cryptocurrency.

Expert Predictions for the Next Crash

Industry experts believe the next cryptocurrency crash will occur sometime in 2022. The second version of Ethereum is set to launch around March next year, after which a crash is likely as collective greed is reset.

Following that, we may enter a prolonged bear market lasting 1-2 years. This is when true crypto investors are tested. Those who entered the market expecting quick riches may be wiped out and forced to sell. Conversely, long-term investors who recognize the technological shift will likely remain patient, waiting for the next bull market when prices gradually recover.

My experience from the 2018 crash taught me that patience and resilience can lead to decent long-term profits. Surviving that downturn is why I’ve prospered in the crypto arena overall.

Final Takeaway

Anticipate cryptocurrency crashes, as they are a normal part of all financial markets.

Prepare a strategy for when prices fall by 50% or more. Educate yourself about blockchain technology to build long-term conviction. Concentrate on investing in Bitcoin and Ethereum. Conduct thorough research to bolster your confidence in your cryptocurrency investments. Remain patient.

When hype and greed reach their peak, a crash is often imminent. The wisdom of Warren Buffett applies to cryptocurrency as well: Be fearful when others are greedy and greedy when others are fearful (especially in the face of a crash).

This article is for informational purposes only and should not be regarded as financial, tax, or legal advice. Always consult with a financial professional before making significant financial decisions.

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