Bull markets in any area of investment bring with them euphoria and recklessness, but the risks are much higher when novice investors and traders can take part. The 2017 cryptocurrency bull run was one such example, where caution was thrown to the wind and fortunes were made and then quickly lost. This was certainly the case for three people who, in various ways, have learned hard lessons over the past two years and who we can, and should, learn from.
John was one of many who saw BitConnect as a way to earn some guaranteed extra money. In an emotional video posted 48 hours after the lending platform announced it was closing down, John bemoaned his lost hopes for “a pot of gold at the end of the rainbow” that he hoped would provide a financial legacy for his autistic son. It was this desire to support his family, coupled with the promises made by BitConnect promoters, that led him to put his life savings into the scheme just three weeks before it closed.
In terms of what we can learn from John’s experience, one line stands out – “I’ve got no money any more – I put it all in BitConnect.” We can learn three things from this. Firstly, if you are going to branch out into investments, don’t put all your eggs in one basket – diversification is key to managing your risk. Secondly, don’t invest more than you can afford to lose. Thirdly, if something claims to be able to guarantee you money, or in other ways seems too good to be true, run for the hills. BitConnect prayed on novice investors desperate for some extra cash, many of whom, like John, have learnt a hard lesson.
Tong Zou is thirty-year-old software engineer who bought Bitcoin in the US in 2018 and sold it through the Canadian crypto exchange QuadrigaCX, with the aim of getting the funds into his Canadian bank account. Unfortunately for Zou, he did this in October, just as QuadrigaCX began delaying withdrawals, which we now know was part of a greater problem. Worse, the amount constituted his entire life savings – CAD 560,000 ($422,000). “I was going to use that money for a deposit on an apartment, but now I can’t do that anymore,” Zou told Bloomberg recently. “And now I’m currently searching for a job, so it’s kind of a bad time for me.”
While this is not exactly a case of Zou gambling on crypto itself to get rich, he nevertheless made the mistake of routing his life savings through cryptocurrency and doing so via a single outlet. Of course, he couldn’t have predicted what would happen with QuadrigaCX, but by having all his money on the exchange at once, Zou was trusting his life savings with a third-party who, it turns out, had a non-existent emergency backup plan. His case acts as a reminder that even the most reputable exchanges are not as secure as traditional banks and almost exclusively have no insurance, meaning investors are not protected in any way. If going through QuadrigaCX really was his only option to get his money from a US bank to a Canadian bank, Zou should have sent a small amount to test with, which would have identified a withdrawal problem and allowed him to take appropriate action.
Kim Hyon-jeong, a Seoul-based 45-year-old teacher and mother of one, invested about 100 million won, or $90,000, into cryptocurrencies in the fall of 2017, money that came from savings, an insurance policy, and a $25,000 loan. After seeing her investment rise to several hundred thousand dollars, Hyon-jeong neglected to sell, and instead watched as her investments went down over 90% through 2018, to the point where they have left her in debt. In August 2018 she said, “I thought that cryptocurrencies would be the one and only breakthrough for ordinary hardworking people like us. I thought my family and I could escape hardship and live more comfortably, but it turned out to be the other way around.”
Hyon-jeong made two critical mistakes that novice investors can learn from. Firstly, as an amateur she didn’t know the value of setting a sell point, a price that represented a good enough return on her investment for her to cash in. Greed and euphoria undoubtedly took over, meaning that she, like thousands of others, didn’t want to miss out on any future gains by selling, leading to her holding onto tokens as they came crashing down, in the hope that they would soon go back up. A bigger mistake was using borrowed money to invest with. Seasoned traders know that this route will eventually catch you out, given that there is no such thing as a sure bet. In a matter of hours you can saddle yourself with months or years’ worth of repayments, and interest, as your ‘sure bet’ fails.
Learn, Don’t Fear
These three cases outline just a few important things for novice investors to remember, regardless of the market or the asset class. We shouldn’t let their experiences frighten us off investing in asset classes such as cryptocurrency, rather they should enable us to invest with clearer minds and clearer strategies to avoid losing out in the way these unfortunate people did.