The sharp ups and downs in price typical for Bitcoin may frighten newcomers to the crypto industry. However, anyone who has been following BTC for a relatively long period of time has grown accustomed to these fluctuations- you are unlikely to be afraid of a fall from $60,000 to $30,000 thousand if you have previously seen a fall from $20,000 to $3,000 thousand and the subsequent long rise to $60,000.

Fluctuations with such high volatility are much less common in traditional financial markets. However, it is possible for financial instruments to drop sharply and cause financial crisis.

A few past crises come to mind- the crisis of 2007-2008 or the dot-com bubble. These phenomena are similar, and cryptocurrency investors can learn a lot from past financial crises.

Let’s look back at our turbulent financial past to see what we can take away.

The following article is a guest post by Bert Kozma, a writer, and Editor-in-Chief at Cryptogeek.info. As an author, he has been covering cryptocurrency and financial markets over the past decade and draws on his years of experience as a marketing and sales expert. Saimaa University of Applied Sciences awarded him a Bachelor of Business in International Business.

Editor’s note: The following article is not investment advice and is intended solely for the purpose of entertainment and education. It is a volatile industry. Before making any investment, consult a licensed financial advisor.

Lesson 1: Follow the Crowd at Your Peril.

The crowd is a poor financial advisor. It panics easily and acts contrary to logic and commonsense.

In 2005, 3 years before the onset of the global financial crisis, several people managed to predict the growing bubble in the USA housing market.

These individuals were able profitably invest and made money during the financial crisis. The book “The Big Short” and the film based on it, Michael Lewis, describes how most “experts” of the time didn’t believe there was a bubble in the market. Those who did were deemed crazy.

Scion Capital hedge funds manager Michael Burry tried to convince his investors that they are using their assets correctly and playing against the market. Some even sued him. He was eventually right, despite all the pressure. After the mortgage market crashed, Scion Capital’s profit was 489 percent – more than $ 2. 69 billion.

A sober and crowd-independent judgment is a useful asset in volatile markets.

Lesson 2: There will always be cycles in a market. Prepare.

Bull market don’t last forever.

This seemingly simple rule is often forgotten by many investors, particularly during periods of steep price appreciation.

Before the 2007 US Real Estate Crisis, which triggered the global financial crisis, real estate prices rose for a long time. In the hope that their property would increase in value, people took out loans to buy real estate they couldn’t afford before.

Regardless of whether it’s dot-com stocks or the housing market or Dogecoin, sooner or later any growth will be followed up by a decline which may or not be disastrous.

Keep this in mind, and don’t lose sight of the possibility.

Lesson 3 – Don’t Give Up on Promising Assets after a Price Drop

When the infamous dot-com bubble burst on March 10, 2000, hundreds of Internet companies went bankrupt, were liquidated, or sold.

Amazon’s stock price since the dot com crash. Source: Miro on Medium

Internet stocks in the late 90s soared inadequately due to the general hype around the emergence of the Internet and its potential use for business. Numerous economists and commentators argued that these high stock prices were justified. Instead of creating their own business models and strategies, the companies spent money on marketing and advertising.

After the crisis, the term “dot-com”, which was used for many years to describe any immature or ill-considered business plan, became obsolete. Investors were reluctant to invest in Internet stocks because of the loss of trust in tech companies.

Today, few people are able to recall bankrupt companies like NorthPoint Communications and Global Crossing. However, many of the startups that emerged from the dot-com boom have significantly more weight: Amazon, eBay and Google are among the most valuable companies in the world.

When the price of bitcoin dropped to $3,000 in 2018, down nearly 90% from its then-ATH, many adamant investors held on. When BTC’s price rose to $64,000 in 2021, they were rewarded for their steady hands and long-term belief in the asset.

Evaluate the long-term prospects of an asset, regardless of the current hype.

Lesson 4 – Diversify

Investing all your funds in a single asset can be very risky.

If you are actively investing in cryptocurrency, diversifying your financial assets into stocks, fiat currencies and real estate is a good idea to reduce the risk of losing everything.

Lesson 5 – Be Wary of Assets that Have No Clear Value

An investment target that is not backed up by real value and has real-world utility is often regarded as dubious. Yet, many speculators take advantage of the opportunity to ride this wave.

These assets were discovered to be Internet stock during the dot-com boom.

During the 2008 crisis, the so-called synthetic CDOs represented bad debt that was much riskier than anticipated.

When we examine the most speculative crypto assets that have prices that pump for just one tweet or seem at random, we consider popular assets such as Dogecoin

Dogecoin, for example, was created as a meme and not the universally recognized vehicle of value like Bitcoin and Ethereum. It has nevertheless experienced significant growth in 2021, thanks in large part to the vocal Doge proponent, Elon Musk.

Granted, some might say that Bitcoin is also an asset that has no real-world value. Bitcoin is the most well-known and oldest cryptocurrency. It has been a reliable source of value and a medium for exchange. The Bitcoin investor ethos is credible because most altcoins can’t boast the same.

While some altcoins have greater technology than others, most coins that are on the market would make foolish investments.

Understand investing in memes in trends can be risky.

Lesson 6 – Bitcoin Investors Should Have a Backup Plan

A large-scale crisis could directly impact the viability and financial stability of financial institutions.

In “The Big Short”, Michael Burry placed a wager against the housing market by using a credit default swap.

Banks were required to pay large amounts of money in the event of a drop in securities prices. He also predicted that the crisis would become so severe that many banks would have to close their doors and not be able to pay their debts.

He saw this scenario coming and decided to only deal with banks that were not closely tied with the housing market, and would be able to withstand a crisis.

Something similar may happen in the cryptocurrency market. Imagine you have made an investment in a cryptocurrency that is only listed on a few exchanges. Imagine that you are unable to sell your assets on these exchanges due to the massive drop in cryptocurrency prices.

Poof – Just like that, your coin’s liquidity dwindles.

You need to have a backup plan.

Perhaps more likely is the restriction of the work of exchanges in the territory of certain countries in the event of a crisis. Now, it’s typical that cryptocurrency exchanges won’t be available to use in certain countries (for example, Hitbtc is not available in the USA). These restrictions may be more severe in the case of a crisis.

What might happen to your digital assets if the country that regulates these exchanges prohibits them from doing business?

Consider where these exchanges are situated and what the country’s cryptocurrency policy could be.

Carefully choose cryptocurrency exchanges and wallets and take into consideration all possible scenarios, and seek self-custody wherever possible.