6 Lessons Bitcoin Investors Should Learn from Past Financial Crises - Featured Image

What’s actually driving the growth of Bitcoin and other cryptocurrencies? And what are the bitcoin lessons for investors they can learn from the way the financial crisis unfolded?

Ever since Bitcoin was introduced to the world and since the very first Bitcoin transaction was made, the cryptocurrency has been making waves.

Bitcoin is only a few years old, so it’s pretty early for making conclusions about how things will work out in the long term. As it turns out, this new currency isn’t the only one that is vulnerable to potential disruptions.

Take the recent financial crisis that rocked the world. The housing bubble burst and the world’s economy went to hell. It was a disastrous, wide-reaching event that triggered a global economic crisis. But, there are still lessons we should learn from it.

In the last few years, it has become clear that Bitcoin has utility as a store of value and as a means of transferring value. But as is often the case with new technologies, we’ve learned very little about how Bitcoin is used in day-to-day transactions.

In this post, we’ll learn from the past and examine six bitcoin lessons for investors that they should learn from past financial crises.

Newcomers to the crypto sector may be scared off by the rapid ups and downs in price that are characteristic of Bitcoin. Anyone who has been following BTC for a long time has gotten used to these swings– you are unlikely to be concerned about a drop from $60,000 to $30,000 if you have previously seen a drop from $20,000 to $3,000 and a subsequent lengthy climb to $60,000.

Traditional financial markets seldom see such high-volatility fluctuations. However, every now and again, the price of financial instruments plummets, putting the financial system in jeopardy.

The crisis of 2007-2008 or the global financial crisis come to mind as examples of previously mentioned cases. These phenomena have a lot in common, and there are numerous bitcoin lessons for investors to learn from previous financial catastrophes.

Let’s examine what we may learn from previous periods of financial turmoil.

Bert Kozma, a writer, and Editor-in-Chief of Cryptogeek.info contributed the following guest post. He’s been writing about cryptocurrencies and financial markets for a decade and draws on his background as a sales and marketing specialist. He graduated from Saimaa University of Applied Sciences with a bachelor’s degree in international business.

Editor’s note: The following material is not meant to provide financial advice and is purely for amusement and education. Because cryptocurrency is such a volatile market, you should always consult with a qualified financial adviser before making any investments.

Lesson 1: Don’t Go Along with the Crowd

When it comes to financial choices, the mob is a lousy adviser; it panics quickly, and its actions are often counter to logic and common sense.

Several individuals were able to foresee the developing bubble in the US home market before the global financial crisis began.

Those people were able to successfully invest and benefit from the financial catastrophe that followed. Most of the “experts” of the time, as described in Michael Lewis’ book “The Big Short” and its namesake film, did not think there was a market bubble, and any who suggested differently were insane.

Michael Burry, the manager of Scion Capital’s hedge fund, ran a campaign to persuade his clients that he is properly investing their money and playing against the market.

Some of them went so far as to file a lawsuit against him. Despite the pressure, he was correct in the end. Scion Capital made a profit of 489 percent when the mortgage market collapsed. 

So, what’s the first piece of bitcoin lessons for investors?

In turbulent markets, a calm, crowd-free judgment is a valuable asset. 

Lesson 2: In a Market, There Will Always Be Cycles

Bull markets do not endure indefinitely.

A significant percentage of investors overlook this apparently obvious and easy guideline, particularly during times of rapid price growth.

Real estate prices had been rising for a long time prior to the 2007 US Real Estate Crisis, which sparked the global financial crisis. It came to the point where individuals took out loans and purchased real estate they couldn’t afford previously in the hopes that the property’s value would increase enough to pay off the debt.

Whether it’s dot-com stocks, the housing market, or Dogecoin, all rise eventually leads to a fall, which may or may not be disastrous.

Keep this possibility in mind and don’t get carried away by optimism’s exhilaration.

Lesson 3: After a Price Drop, Don’t Give Up on Promising Assets

Hundreds of Internet businesses went bankrupt, were liquidated, or were sold as the notorious dot-com bubble burst in 2000.

The value of Amazon’s shares since the dot-com bubble burst. Miro on Medium is the source of this information.

Due to the overall excitement around the development of the Internet and its potential application for business, Internet stocks surged significantly in the late 1990s.

Numerous pundits and economists defended the high stock values of these businesses. Instead of building their own business strategies, the businesses spent money on advertising and marketing.

Following the events of the crisis, the term “dot-com” came to mean any immature, ill-considered company plan for many years. Investors were hesitant to invest in Internet-related equities as their faith in tech firms deteriorated.

Few people remember failed businesses like NorthPoint Communications or Global Crossing today, but many of the dot-com bubble’s scrappy startups are now household names: Amazon, eBay, and Google are among the world’s most valuable corporations.

Many ardent investors stayed on as the price of bitcoin fell to around $3,000 in 2018. They were rewarded for their calm hands and long-term confidence in BTC as its price soared to $64,000 in 2021.

Examine an asset’s long-term potential, independent of present hoopla. 

Lesson 4: Broaden Your Horizons

Putting all of your money into a single asset may be very hazardous. This can be applied to the world outside cryptocurrencies, but it is definitely one of the bitcoin lessons for investors to be kept in mind.

If you’re investing in cryptocurrencies, it’s a good idea to diversify your portfolio with equities, fiat currencies, real estate, gold, and other assets, at the very least to reduce the danger of losing all your eggs in one basket. With the latest trend within cryptocurrencies, NFTs would also serve as a diversification strategy that could broaden the investor’s horizon.

Lesson 5: Assets With No Clear Value Should Be Avoided

Many speculators perceive an asset that is not supported by the actual value and may be used in the real world as a risky investment objective, but they leap at the chance to ride the wave.

These assets turned out to be Internet firm shares during the dot-com bubble.

The so-called synthetic CDOs constituted bad debt that was riskier than expected during the 2008 financial crisis.

Popular assets like Dogecoin and Safemoon are among the most speculative cryptocurrency assets, with values that can fluctuate based on a single tweet or apparently at random.

Dogecoin, for example, was developed as a joke rather than a widely accepted medium of exchange like Bitcoin or Ethereum. Despite this, it grew significantly in 2021, due in great part to Elon Musk, a strong proponent of the Doge.

Granted, some might say that Bitcoin is also an asset that has no real-world value. However, as the oldest and best-known cryptocurrency, bitcoin has already become an established source of value and medium of exchange. Most altcoins cannot boast of the same, so there is some credibility to the Bitcoin investor ethos.

While some cryptocurrencies offer value in the form of improved technology, many of the coins on the market are just bad investments.

It’s important to understand that investing in memes and trends may be hazardous. 

Lesson 6: Bitcoin Speculators Should Have a Plan B

Financial institutions’ viability may be directly impacted by a large-scale crisis.

Michael Burry, as shown in the film “The Big Short,” used a credit default swap mechanism to gamble against the housing market.

Banks were obliged to pay him huge amounts of money if the value of his securities fell. At the same time, he anticipated that the crisis would be so severe that many of these institutions would be forced to collapse and would be unable to repay him.

He anticipated this possibility and decided to work exclusively with institutions that were not so tightly tied to the housing industry and would be able to survive a financial crisis.

In the bitcoin market, something similar might happen. Assume you’ve invested in a coin that’s only available on a few cryptocurrency exchanges. Imagine that these exchanges have collapsed as a result of a huge decrease in bitcoin values, leaving you nowhere to sell your holdings.

Poof, your coin’s liquidity is depleted in an instant.

You must have a backup plan in place.

In the case of a crisis, the limitation of exchange work on the territory of specific nations is maybe more probable. It is becoming common for cryptocurrency exchanges to be unavailable in some regions (for example, Hitbtc is not available in the USA). These limitations may grow more severe in the case of a catastrophe.

What happens to your digital assets held on exchanges if the government that governs them prohibits them from operating?

Consider where nation these exchanges are based in, as well as how that country’s cryptocurrency regulation may evolve in the future.

Consider all potential situations when selecting bitcoin exchanges and wallets, and seek self-custody wherever feasible. 

Bitcoin has failed so many times that it has almost become synonymous with failure. What’s even more concerning is that the Bitcoin community itself has failed to learn from its previous mistakes. This has lead to a cycle of failure that can’t be broken. Read more about cryptocurrency coin reviews and let us know what you think.