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Lessons from crypto winter (so far)

For Bitvo by Tristram Waye | Aug 25, 2022

Crypto winter - Lessons from crypto winter (so far)Nobody knows how far we are through crypto winter, but like the previous winter, the building continues. There is lots of cash and talent in the space building, developing and experimenting.  Down markets also reveal numerous valuable lessons.

Leverage “don’t get no respect”

  • One lesson is that leverage remains the Rodney Dangerfield of the crypto world. Dangerfield’s famous quote about “don’t get no respect” applies to the way in which certain entities abused leverage. The result has been numerous institutional implosions by centralized entities due to hidden leverage and asymmetric information in a decentralized unregulated environment.
  • While leaders in the space like FTX and Binance have reduced leverage for retail participants, everyone remains subject to big swings due to the wide use of leverage elsewhere. This has led to weakness in several businesses and failure in several more.

Crypto trading opportunities are unfolding

  • Throughout the worst part of this winter so far, there were also numerous opportunities. These are the opportunities you will see in retrospect. But for savvy traders, these opportunities will represent great entry points.
  • We covered using leverage without leverage by exploiting liquidations. And to help you do this, you can use some basic technical analysis like support and resistance lines and volume changes.  By examining the whole market, you can see where opportunities may be shaping up.
  • The reason is that risk operates on a pendulum. We talked about this concept recently. The idea is that you can see risk being added and when it’s being reduced. Leverage is a substantial part of this process.

More confidence means more risk. Less confidence and a high level of fear mean less risk. The risk pendulum is an ongoing process that benefits traders looking for opportunities.

Too good to be true is still a reality

  • Celsius built what could have been a viable business model and a very profitable one. But, by scaling beyond the capability of the market and their skillset, they took on unnecessary risk and transferred it to their customers.
  • So yields and advertised rates should reflect both return and potential risk and be assessed accordingly.

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Concentration versus diversification

  • Another important observation is the concentration of assets in one project. We discussed this in the article on thinking like a financial advisor.  There are still too many people putting substantial or all of their assets into a single high risk speculative project. Crypto, with all of its promise, has risks. And those risks create outsized opportunities for gains, as well as for losses.

Community and liquidity

  • We are also seeing the challenges with community and its relationship to liquidity. Strong communities continue to thrive and evolve. But even these go quiet from time to time. This is common behavior in any market. In bull markets, liquidity is high, and action gives the appearance of forever liquidity. It flows like water.
  • But when things quiet down, this can change dramatically. The results can be widening spreads which can increase slippage. It can mean difficulty selling positions or assets like NFTs and difficulty pricing or valuing them. Or it can mean that clearing prices, where liquidity can be found, are much lower than you may have expected when you entered the position. This can happen in any asset

Regulatory feeding frenzy

  • Regulation is another thing that has come to the forefront. This has always been a hot topic for crypto. But when you have meltdowns and significant public losses, regulators start to look more closely. These calamities end up being a catalyst for more regulation.

See:  Crypto Exchanges Comply But Ethereum Community Unhappy About Harsh Canadian Rules

  • The challenge with most regulation is that it is focused on the past instead of the future. Meaning that every market calamity means regulators are fighting the last war instead of the next one. Decisions around the last war inevitably lead to unintended consequences for markets in the future.
  • Competition for regulatory control is ongoing, and in this crypto winter, particularly in the US, events of 2022 have created a battle between the CFTC, SEC, and other parties to attempt to control crypto’s future.

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