Millions of Americans’ life savings were wiped out in days.
As rumors of insolvency spread, the panic mounted. People scrambled to withdraw their funds. But they were too late…
This scenario could just as easily describe what happened in October 1929 as what we saw last week.
The “crypto winter” that began in November 2021 and has seen bitcoin fall 70% is now looking like a “crypto Great Depression.”
Just like the Great Depression, many people are left unable to touch their funds – and might never ever be able to access them again.
Bloomberg estimates those who held their crypto on FTX – which filed for bankruptcy last week – will be lucky to get back 10% of their assets. And even if they do, it could be several years before they see a penny.
In the 1930s, 9,000 banks failed… And with the collapse of crypto exchanges Mount Gox, Celsius, BlockFi, Voyager, and now FTX, many fear it’s not the end of trouble for the crypto world.
While government regulation came to the rescue of banks almost a century ago, it’s unclear whether the same will be true for crypto.
Here at Intelligent Income Daily, our goal isn’t to predict what the future will bring. Instead, we want to find the safest ways to reliably boost income regardless of what lies ahead. And by equipping yourself with the right tools, you can protect your wealth through it all.
Today, I’m bringing in my analyst Adam Galas to tell you about one mistake many crypto investors made that could have saved them from much of the destruction.
This important lesson in managing risk is one that can help you when making investing decisions, even for those who never bought or plan to buy any crypto.
It’s Not What You Make… It’s What You Keep That Counts
According to Bloomberg, Sam Bankman-Fried founded FTX in 2019. And his net worth peaked at $26 billion just seven months ago. Today, he’s effectively broke.
But it wasn’t just Bankman-Fried… Plenty of crypto millionaires are suffering, too, having lost much of the value of their accumulated wealth.
You might even know someone who’s been burned by the recent crypto fallout.
Adam even felt the effects personally, as he tells it:
My uncle is the smartest man I know. He has a Ph.D. from Princeton and now works for Alphabet as a top AI software engineer.
And he had 50% of his net worth in crypto, a cool $1 million. For 18 months, he seemed like a genius when all it did was go up.
And that 50% allocation to this hyper-volatile, speculative asset seems conservative compared to the 75% to 100% allocations some new investors who got started in the pandemic were using.
My uncle was wiped out by the Terra/Luna and Celsius collapse, losing all of his $1 million.
Fortunately, the rest of his money was invested in the world’s best blue chips, so he’s still on track for a comfortable retirement. But most people who were as heavily invested as he was in crypto weren’t so lucky.
I myself had two bitcoins I was holding at Celsius. I’ve now lost that investment because Celsius is also bankrupt.
A study from Yale concluded that the optimal allocation to crypto was 1% to 6% for most portfolios.
That’s a conservative allocation that would protect your portfolio in the case of a complete loss, which is exactly what so many crypto investors are now facing.
Sizing your position based on your personal risk profile is called asset allocation, and it’s the cornerstone of retirement planning.
It’s also something many new crypto investors didn’t think about and now likely regret. When crypto assets are soaring up to 100% in a week and 10X, 100X, or even 1000X in a year, who cares about risk? It seemed like the biggest risk was not owning enough crypto and not letting your winners run to the moon and beyond…
The Most Important Part About Managing Risk
Now, we’re not here to gloat over people’s lost crypto fortunes.
But we’d be foolish not to learn from their mistakes.
And the lesson is this: Prudent risk management is the most important aspect of successful long-term investing. And keeping your positions varied and manageable in size will be your saving grace in case one of them doesn’t end up panning out.
Here’s Adam with another example of how this played out in front of his eyes:
Mount Gox was the first large crypto exchange in the world, and it helped many people buy bitcoin at $5 or less.
I have a friend who bought 300 bitcoin at Mount Gox as a $1,500 speculative punt. In 2014, Mount Gox was hacked. And the bitcoin people held there were stolen, including my friend’s.
The company filed for bankruptcy. Eight years later, my friend has yet to see a penny. He’ll be lucky to get back a few pennies on the dollar in cash, let alone a single bitcoin.
Did my friend risk his future with a $1,500 speculative investment in bitcoin in 2013? No.
But does the fact that he lost 300 Bitcoin that today are worth almost $5 million still haunt him? Partially yes. He trusted the wrong company for the custody of his asset, just like millions trusted the wrong bank in the Great Depression.
But his risk – and thus, losses – were small enough not to wipe him out.
The bottom line is that if you size your risk correctly, you can set yourself up to survive and thrive when the unexpected strikes.
This is true of all assets, from risk-free treasuries to the most speculative crypto tokens.
With the correct asset allocation for your needs and risk profile, you can sleep well at night during all kinds of market conditions.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. Diversification and asset allocation can protect you when volatility hits. That’s why we’ve put together a portfolio of the best income-producing stocks across various market sectors. Having this varied exposure can help your overall portfolio if one sector takes a hit. And help you continue earning income through it all. Click here to learn how to access it.