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Cryptocurrency Investing Insights: The Importance of Diversification
Cryptocurrency Investing Insights: The Importance of Diversification

In recent months, cryptocurrency markets have experienced a period of increased volatility due to numerous factors, including the failure of popular cryptocurrency Terra (LUNA), the liquidation of cryptocurrency hedge fund Three Arrows Capital (3AC), and the bankruptcy of Celsius and Voyager digital, a crypto lender and trading platform, respectively.

The precise details of these various events will be covered in future articles. However, this particular article will highlight the failure of cryptocurrency Terra (LUNA) and offer readers a key takeaway based on this event.

 

Broader Market Correction

Beyond the broader market correction experienced during 2021 and 2022, which has seen Bitcoin (BTC) fall from a 52-week high of approximately $69,000 to a 52-week low of approximately $17,500, and Ethereum (ETH) from a 52-week high of approximately $4,900 to a 52-week low of approximately $880, several notable events have occurred, the most notable of which have been highlighted above. These events have contributed to a prolonged bear market and exacerbated volatility.


Terra (LUNA)

 

The first notable event occurred in early May, when formerly standout cryptocurrency Terra (LUNA) plunged from a 52-week high of approximately $119 to roughly zero, with the bulk of this drop occurring over the span of one week.

In essence, this was caused by Terra’s algorithmic stablecoin   TerraUSD (UST) “depegging” from its expected price of $1.00. Without covering the precise mechanics of the crash of this stablecoin and the broader Terra ecosystem, many investors viewed the ecosystem and associated platforms—most notable of which was Anchor Protocol (ANC)—as a safe haven for their assets. This was a crushing blow to many investors who placed large sums of money into the ecosystem under the assumption that their funds were protected and compounding passively. Even billionaire Mike Novograts frequently appeared on financial news network CNBC, touting the Terra ecosystem.

 

Key Takeaways

When these events occurred, approximately $40 billion in user assets were reduced to essentially nothing. Twitter users were quick to react to these events, highlighting massive losses, with many investors noting entire life savings being lost amidst the turmoil.

Although it may appear obvious—as they say, “hindsight is 20/20”—this sequence of events highlights the importance of one of the most fundamental aspects of investing: diversification. This is particularly pertinent in a space as volatile as cryptocurrencies.

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