Three lessons from the recent sell-off in cryptocurrencies

By Ilona Limonta-Volkova

The recent sell-off in cryptocurrencies is unprecedented. Bitcoin has lost more than 70% of its value since hitting a record high in November, with the Celsius lending platform announcing it will “freeze” a significant portion of its business. Digital currency is preparing for even more pain.Although this volatile environment is expected to continue for a long time to come, there are some lessons we need to learn from what we have experienced so far.

Past returns are not indicative of future ones

A few phrases condense the investment culture as much as the above. This proposition is as common as the “sell-in” date in milk, but nonetheless, it is often overlooked in the performance appraisal process.Mot patterns are a powerful tool in financial analysis, yet even the most experienced Investors fall into the trap of assuming that “this time it will not be like the previous ones”. We see elements of this view in the institutions’ liquidity forecasts. Although it is reasonably known that no recession is comparable to the previous one, the vast majority of the downward estimates are based on the 2008 global financial crisis.

But what if the next recession lasts twice as long? It is impossible to predict whether the next downturn will have similar characteristics in terms of size and duration. Similarly, short-term “leaps” played a catalytic role in much of the cryptocurrency market, and as prices rose, so did the volume of investment, according to the Wall Street Journal, reaching almost $ 3 trillion. ”. The fall in the prices of cryptocurrencies is by no means inevitable. However, it is a reasonable reminder that we should not rely on yesterday’s odds.

Sound skepticism is essential

I studied at the Wharton School of the University of Pennsylvania. I have an MBA from Kellogg. They work in the field of financial services. Theoretically, I have the typical qualifications of someone who should understand, from a conceptual point of view, cryptocurrencies and decentralized funding. But again, these would mean that you have to spend for these processes.

Discussing with other scholars whether or not one has invested in digital currencies has suddenly become an invisible indicator of what one has “knowledge.” However, the sell-off in the market is a reasonable reminder of the importance of forming a well-reasoned opposite view.

It is not wrong you will stay on the sidelines

In a landscape as rapidly evolving as that of financial technology (fintech), products, concepts and analyzes are constantly evolving. It makes perfect sense for one to observe patiently, instead of actively participating. He does not need to form an opinion immediately, or even at all. He can take his time to learn, ask questions and come to his own conclusions.

What happens next?

Potentially, this is the tip of the iceberg for cryptocurrency prices to fall. The implications are far-reaching: last week Coinbase announced that it would reduce its staff by 18%. As volatility continues to permeate every aspect of the wider market, everyone has to ask themselves difficult questions, and begin to prepare for new realities.