What Are the Top 3 Lessons From the 2022 Crypto Crash?

#1. Contagion is Real

In crypto, a contagion effect is when one project fails, and the effect is felt in the entire market. No year was this demonstrated more clearly than in 2022, with the Terra (LUNA) collapse in May triggering a chain reaction from which the industry is still reeling in early 2023.

Terra’s fall and ensuing contagion were so far-reaching that up to $500 billion in value was wiped off the market.

Some companies that were direct casualties of Terra going down include Celsius, Three Arrows Capital (3AC), and Voyager Digital. The latter two companies had to fold after TerraUSD, which they held in significant amounts, collapsed. Their problems were compounded by the freefalling market prices that further dried up their coffers.

FTX’s windup in November would unleash more contagion. BlockFi, a crypto lender, declared bankruptcy due to “significant exposure” to the exchange. Hong Kong-based exchange AAX also went belly up. Other forms of contagion included platforms halting withdrawals, including Genesis and crypto lender SALT.

#2. No Crypto Project is Too Big To Fail

Not even the high-flying FTX or Terra (LUNA) that looked larger than life only for each to eventually come crashing down.

FTX looked too big to fail due to its consistent rank in the top five exchanges and its market valuation. At its height, 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 high-flying Terra (LUNA) ecosystem in May had already illustrated that even big projects aren’t immune to failure. Its beginning of the end came after the algorithmic mechanics of the platform’s TerraUSD stablecoin became unsustainable and crashed under the weight of a massive selloff, falling from $1 to cents in a week. Its native token, Luna, also crashed by 99% in the same period.

At its peak, TerraUSD was worth $18 billion and firmly in the top ten in market ranking.

The lesson is that the crypto 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 Old Fashioned

In the utterly bonkers world of crypto investing, good old fashioned due diligence will never go out of style. It’ll save you heartache when the chips fall (and they often do).

Remember, unlike its level-headed traditional counterpart, decentralized finance is defined by crazy price swings and new and flashy finance products that any new company can purport to offer.

Due to that largely un-monitored and laissez-faire environment, cryptocurrency investors often have little to no recourse in the event they lose money. What this means, as 2022 showed, is that you have to educate yourself before you put your hard earned money anywhere.

Some ways you can do that:

1. Researching the project: Check everything about the company’s social media activity, from the founders’ credentials to their level of transparency to what others say about it on social media forums to the competition. If something feels off, it probably is.
2. Don’t leave your money on centralized exchanges (CEXs) and DeFi platforms: Thousands of customers’ money is frozen in FTX after the exchange folded, for example. DeFi bankruptcies, including Celsius and Voyager Digital, also resulted in frozen customer funds.  It’s not a given if customers will get this money back eventually or how long it will take. Another hazard of these platforms is they can get hacked. Last year earned itself the notoriety of “the biggest year for crypto hacking,” with over 100 protocol breaches and over $2.5 billion siphoned off. Take charge of your money by storing it in a hardware wallet.
3. Use a hardware wallet for long-term storage: It’s 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’s immune to internet vulnerabilities such as hacks and malware. The “not your keys, not your coins” mantra comes into play.

Hope for the Best, Prepare for the Worst

Savvy investors know that in the unpredictable world of crypto, you hope for the best and prepare for the worst. This approach strikes a delicate balance in the knife-edge slope that can be crypto profitability and loss.

Hoping for the best and preparing for the worst means putting in money you can afford to lose.

For instance, last year’s market upheavals left many crypto investors in the cold, with tales of people who poured their entire savings into crypto only to get locked out of them.

Preparing for the worst means whichever way the market winds blow, you win. Find a way to position yourself in the market where you’ll either make money, not lose money, or take an acceptable loss.

The Bottomline: Lessons Need to Be Learned

Industry players must take stock of last year and apply those lessons for the future. The health of the ecosystem depends on it.

Crypto is a space that’s still clamoring for mainstream acceptance, and it doesn’t have the luxury of repeated mistakes.