5 Valuable Lessons from the Cryptocurrency Market in 2018

2018 is a memorable year for the cryptocurrency market, with many noteworthy events throughout the year. It must be acknowledged that 2018 is considered a year of volatility due to the market crash, which caused the value of cryptocurrencies to lose over 80%. Perhaps the best indicator of the cryptocurrency market is Bitcoin, representing the first and largest decentralized cryptocurrency by market capitalization. From its record high of nearly $20,000, the price of Bitcoin - as well as the price of all coins and tokens - has sharply declined since the beginning of the year.

Due to the intensity of the collapse, many people have hypothesized that the cryptocurrency 'bubble' has burst or worse, cryptocurrencies are heading towards extinction. However, this article will examine the potential positive outcomes that can be achieved throughout this catastrophic year. Lesson 1: The Crazy World of Cryptocurrency The cryptocurrency market is extremely abnormal and volatile. The entire industry is unregulated, creating a breeding ground for scams, ponzi schemes, and 'money grab' projects. Furthermore, the involvement of cryptocurrency exchanges in market price manipulation and trading volume is understandable. Indeed, this market is flooded with illegal activities that you would not typically encounter in traditional investment markets. Insider trading, money laundering, and pump & dump related to cryptocurrencies are commonplace. No one can deny the revolutionary nature of blockchain technology, but the negative aspects that come with the cryptocurrency market - as mentioned above - can be quite crazy to consider. The worrying part is that anyone can participate in the market because there are very few safeguards. This means that an ordinary person without investment knowledge or even understanding of the technology can get involved in cryptocurrencies and gamble away their life savings. We can learn one or two things from Harold, in the picture below: Lesson 2: No One Can Predict the Market The youthfulness of technology along with the extreme market volatility makes it nearly impossible for anyone to predict the price at any given time frame. This is not surprising as traditional models for valuing assets and making any reliable price predictions do not apply to cryptocurrency. Why? Because cryptocurrency projects are not regulated and therefore may not have any financial reports in the form of cash flow statements, balance sheets, and profit and loss (P&L) statements. Without traditional financial data, it is difficult to evaluate and quantify the true value of cryptocurrencies. Anyone can make predictions about the price of Bitcoin for tomorrow or even next year, but there will be no credibility without measurable and proven data to support such claims. The market is constantly flooded with experts and masters making predictions. Almost all predictions are completely inaccurate, regardless of whether they are slightly conservative or completely ambitious. Let's take a look at John Mcafee, a cybersecurity master who has a divisive figure in the cryptocurrency world. He predicts that Bitcoin will reach $1 million in 2020. Some of these predictions are controversial and have no predictive value. Even the most famous Bitcoin forecaster on Wall Street - Tom Lee - has given up predicting Bitcoin prices after many failed predictions throughout 2018. He wrote to his clients: "We are tired of being asked about the target price... Due to the inherent volatility of cryptocurrencies, we will stop providing any timeframe to realize reasonable value." Lesson 3: High Risk, High Profit Traditional financial theory states that the potential profit one can expect from their investments is directly correlated to the level of risk associated with the asset they own. In other words, higher risk corresponds to higher potential profit.

It is clear that cryptocurrency is the riskiest investment you can make due to the technology being relatively new, lack of regulations, and extreme price fluctuations. In addition, it is not surprising to hear about cryptocurrency exchanges manipulating prices in the market. Let's consider the volatility of the cryptocurrency market capitalization to understand their level of fluctuation:

Growing over 4,700% in 2017 and then losing over 75% of its value the following year, cryptocurrencies have become an extremely volatile investment. A risky market like the cryptocurrency market is a double-edged sword; you can make a large amount of money but you can also lose it all. The market crash in 2018 is evidence of the inherent instability of cryptocurrencies and an important lesson for anyone looking to enter the market. You must be prepared for the risks you face when investing in cryptocurrencies. Thorough evaluation and fundamental understanding of cryptocurrencies are crucial steps in your investment process. Lesson 4: Most Projects Will Fail The golden age of raising hundreds of millions of dollars through initial coin offerings (ICOs) for cryptocurrency projects is over and we can see the consequences of it. A report found that nearly 50% of token projects were not active in the fifth month or longer. It is even worse for projects that do not report their capital and are not listed on any exchanges, with over 83% being inactive after 4 months. These are staggering numbers for the ICO market as a whole. Here are the reasons why ICOs fail:

These numbers are evidence of the strong momentum and frenzy that gripped the ICO market, without any real substance or feasibility behind the ICO projects. It was easy to get caught up in the ICO frenzy in 2017, as the average returns for ICO tokens in 2017 exceeded 1,320%! However, the price market downturn in 2018 led to the price destruction of all tokens from ICO projects. Most of these newly issued coins even dropped below their initial ICO price. It's no surprise that many people have lost a huge amount of assets in the ICO market. This is a painful lesson that the unregulated nature of cryptocurrencies in ICOs requires people to participate in a rigorous due diligence process before investing in any project. Lesson 5: Risk Management is the Key In a high-risk market, it is important that you know how to manage your risks well. Managing your risks requires taking appropriate measures to reduce the likelihood of losses in your investments and maximize your profit potential. Here are ways to effectively manage your risks: Diversify: Do not invest all your net worth in cryptocurrencies. That would be like committing suicide. Learn about other investment options such as stocks, commodities, and real estate. Different types of assets have different levels of risk; if you are risk-averse, your investment portfolio will mainly consist of safe investments, with a small portion in high-risk assets like cryptocurrencies. Even within your cryptocurrency investment portfolio, learn about your investments in different coins and assets, such as:Base Currency: Base currencies represent the most popular cryptocurrencies that all other coins and tokens are quoted against. They are the largest currencies in terms of trading volume, with Bitcoin (BTC) and Ethereum (ETH) being common base currencies.Stablecoin: Coins pegged to stable assets such as Gold and USD. Stablecoins are important because they provide stability in the volatile cryptocurrency environment.Interest-bearing: Coins that offer 'dividends' or fixed interest rates for depositing your money in a digital wallet. This agreement is similar to your bank account, where you earn interest on your cash deposit. Interest-bearing coins are supported by the Proof-of-Stake (POS) consensus mechanism.Cash: Always ensure to hold a portion of your cryptocurrency portfolio in cash as a buffer. You never know when you might need cash to cover living expenses or simply when to re-enter the market if cryptocurrency prices are low.Take your profits: Perhaps one of the important decisions you have to make is realizing your profits over time. If cryptocurrency prices rise significantly, do not hesitate to take profits or 'cash out'. This becomes extremely difficult when prices soar, and people believe that prices will continue to rise indefinitely. That will not happen. That is why taking some profits off the table when prices start to rise is wise. This does not mean selling off or liquidating all your coins, but a portion of them. Having excess cash is always a good thing.Stop-Loss: Stop-loss is an automatic mechanism to sell a coin when it reaches a certain price level, designed to limit investor losses when the price of a coin declines or to protect investor profits if the price exceeds a certain target. Having a stop-loss order is an important part of protecting your investment portfolio from unfavorable price fluctuations and sudden drops.

Summary Cryptocurrency has come a long way since Bitcoin was born in 2008. From a single currency, a revolutionary capable of disrupting the traditional monetary system, it has evolved into a vibrant ecosystem comprising over 2,000 currencies and tokens created to address various issues. The core innovation and development of blockchain technology can disrupt many traditional systems and applications. However, there are many challenges that come with it. The lack of regulations and the immature market have created a dangerous environment for the public. We can only hope that, at the right time, the market expansion will go in the right direction.