It has been a while since the news about the crash of Terra Luna as well as its stablecoin, UST. The news was so huge that even people who know nothing about cryptocurrency seem to have heard about it. So much so that somehow some of these people use this as an example as to why not to “invest” in cryptocurrency even though they do not know how it went down, where the weakness was, etc. because I actually had to explain to a group of people one time as to the reason why it crashed. However, all they cared about was just cryptocurrency is a no-go and it was proven, just like how Warren Buffet — Charlie Munger duo believed.
On the other hand, being a software engineer, I still do not totally dismiss the potential that Web3 stuff has though in the perspective of investment, everybody has to still be really careful as there is no doubt that it is still in a very early stage. This also means that there could be a lot of failures still; worst, there might be a lot of scammers still. Nonetheless, during the crash period, I was actually kind of following the news and how people are digging here and there about Terra itself. Some people then started to point out how there were issues way before the incident happened. Some provided opinions backed by statistics and graphs as proof.
Subsequently, some of the bloggers that I follow started to post about their post-mortem. Some have more damages as compared to others as they believe in the really high return that they actually converted their usual investment into pure crypto investments, with the number one coin in holdings being the LUNA coin. Some simply had to write off their investment in Terra Luna but damages were still big as they still put in a pretty big sum into it.
On top of that, those bloggers would also start posting on lessons learned from this crash. This is where they started to make me think about how some of these lessons are applicable to stocks and not only cryptocurrency. Afterall, they are just different asset classes. Also, we are just not a perfect investor that can always be right. Even the professionals can lose, let alone the DIY investors like us.
Regardless, this is why we always proceed with caution, sizing is always advised, and learning is continuous.
Risk comes from not knowing what you are doing. — Warren Buffett
Here are 5 of the most observed lessons mentioned and derived:
- Never invest in something that you don’t know
- Fear of cutting losses
- Diversification
- Portfolio sizing
- FOMO or Greed?
Let’s get into them!
1. Never invest in something that you don’t know
Some of the points mentioned related to this point is that investors don’t know that Luna is related to UST which also means they don’t know the existence of Anchor Protocol. They just wanted to invest in Luna because it has huge potentials considering the ecosystem is wide.
Fair to say that they probably have read up on Luna. However, they might have just read about the coin itself and its use which somehow might miss out on its link with UST, the Terra stablecoin. There could be a lot of reasons as to why they might miss: blinded by the possible gains after seeing how the coin could run up really high, be careful enough that the investors might still do research about the coin but not in-depth enough as the notification has pinged the investors to invest, or they just don’t know how wide they should research about as crypto is a new thing and there might be no one guide as to how to invest in an alternative coin.
Long story short, all of the examples pointed out a lesson where we should always invest in something that we know. In my perspective, after this saga, it is easier said than done.
How do you know you have researched enough? In some of the blogs that I have read, it shows that one doesn’t know if one has researched enough. This is like you don’t know what you don’t know. Basically, if you think you might already know it, you actually might have not known enough. This also means there is always that risk.
The thing is, this applies to the stock market too in my opinion. You might think you know enough, by reading all about the company, its statements, charts, etc. However, there are variables that you might not know fully that can mess you up. They can be the people that manage the company, what they are thinking, the government, or the sentiment (which really killed Terra Luna).
Last but not least, I feel that this shows that maybe investing in companies that you actually experience yourself might still be better as you know how the companies look like, the quality of the services, and of course how the traffic is like (especially in malls). You might also be able to think more clearly what potential risks that the companies can face.
That reminded me of how there are people who just advocate for an ETF investing strategy as you don’t have to be worried about individual companies to their details. One example I always heard from a Singaporean investor is to just invest in S&P500 and NASDAQ ETFs as they are confirmed to always go up in the long run, and you can just pay attention to macro economics. (Not what I say, it’s one of the examples that I have heard about, which is not wrong too in my opinion. Always DYOR)
2. Fear of cutting losses
This one. I can understand. Everything about money, it’s just hard. That’s why I feel someone that has no emotions might be the best investor.
I have read a writing whereby the investor is considered experienced, but somehow he still succumbed to his emotions (which he admitted). He thought that it might go up still as the community is strong, the founder is amazing (except the fact that his reputation was tarnished), and the founder took steps that might be able to rescue it. His reasoning is not wrong. There are always chances.
This is where these questions come from. When should one start to cut losses? How big? Do we need to consider the fact that there might be chances for it to go up?
Based on my reading about technical analysis and stuff, there is a certain percentage that you can determine on when to cut loss and the caveat is you have to always follow regardless. If you don’t follow, it loses its point. This thing is also called the stop loss. But again, how do we weigh the pros and cons of the chances? Might be a thing to consider.
3. Diversification
This observation is pretty crucial, in my opinion. You would like to diversify to minimize losses usually as you spread out the risks. This diversification can be about diversifying to other asset classes or diversifying within the asset class.
In my opinion, diversifying to other asset classes has a higher chance of minimizing risks as not only other asset classes like properties or stock markets have long-dated history, there are a lot more professionals that you can learn from in regards to such asset classes. Crypto asset class however, is pretty new. A lot of noises are flying around and people are still learning. Even though some of them might consider themselves pretty knowledgeable, still, historically speaking, we cannot analyze crypto asset classes as well as other asset classes.
Otherwise, there are also people applying diversification within the asset class itself. For example, instead of holding only one coin in high allocation, they also bought other coins, especially the so-called blue chips of crypto, bitcoin and ethereum (not investing advice). Just like in the stock market, you buy different stocks from different geography even better to diversify. So this logic is kind of used by people in the crypto world as well. This leads to the next point.
4. Portfolio sizing
This is mentioned often, together with diversification as a way to minimize risk too. By limiting your exposure to the crypto asset to a certain (small) percentage in your whole portfolio, you can control the downside of your portfolio when the world is going down.
From what I have observed, usually people say that if you want to have crypto assets as part of your portfolio, it is better to have 5% or less. What I don’t see often is the sizing within the asset class itself. Inside the equity world, very often you will see people say that maybe you can allocate like 5% for each stock. I don’t see this often mentioned in crypto investing.
Theoretically and logically speaking, if it works in the other asset class, it should work in the crypto asset class too. However, what I think makes it tricky is that crypto is still new and there is not much history to it. Also, there are a lot of people who are not familiar with investing, investing in the cryptocurrency. These people might be prone to hype and noises and most importantly, to their own emotions. This in turn, can affect the market negatively, especially during the downturn as those people might panic sell.
On top of that, there are a lot of newcomers that might hype their own stuff and then fail later on. This is definitely another risk that everybody has to think about even until now.
So yeah, this point is definitely worth considering, as a way to help you to limit risk.
5. FOMO or Greed?
This is another observation that I made. Some people still bought the LUNA coin when it was crashing and crashing further. One of the reasons: they either missed it before, saw it went up so high, that now it had crashed and made it look very attractive. Another reason: they had bought a lot when it was cheap, ran up high, and then down again, seeing this as an opportunity to double up their wealth really quick.
Well, I have to say everybody ought to be cautious when dealing with investment as there are risks in investing. This feeling of being cautious also applies to other asset classes. What I think made this point an important reminder is that it is a high risk asset class. I know it can give high reward, but still, one cannot simply ignore the high risk. Sometimes the market is right that when it is down, it might be better to follow the crowd instead of succumbing to greed or having that FOMO that pushes you to make a bad decision. Especially if you are dealing with high risk assets, emotions can make it twice worse.
But again, this boils down to one’s emotion. If you can’t control well, it’s pretty bad to start investing. Therefore, at least try to remind yourself not to be FOMO or greedy.
Wrap-Up
After looking at the 5 observations, I can say that there are 3 things that one can take to apply in investing in general:
- Don’t be emotional when you are doing an investment.
- Always read up and research.
- Always think of minimizing risks.
Emotions really play a big part in investment. They are what cause volatility, as people would say the market sentiment. However, for yourself, it’s always better to be zen to not make bad decisions for your own portfolio.
On top of that, it’s good to always read up, be it about the news or the company’s activities. At least, you are aware about some stuff instead of being ignorant as being ignorant in itself poses risks.
Last but not least, while deciding, try to always take into account how to minimize risks if possible. For example, before investing in crypto, you can always convince yourself about the scenario when you lose money in it so that you are mentally prepared.
They might be basics, but having good basics can form good foundations.
With that, thank you for reading. If you think these might be helpful to other people, feel free to share. Also, I am not a professional and this article is by no means an advice to buy nor sell. Always do your own research. Believe in yourself and not other people.
Thank you for reading.
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