First, do no harm by protecting your investments in a volatile crypto winter

As a long-time physician, I spend a lot of time thinking about how I can help my patients get better when they are struggling with complex immunological challenges. What treatments can relieve their problems? Can I recommend lifestyle, dietary or other changes to reduce exposure to problematic substances or conditions? It is all governed by the centuries-old medical principle: First, Do no harm (from Latin, Primum Non-Nocere).

As a long-time cryptocurrency investor, I bring some of the same do-no-harm mentality, especially at a time when the prices of Bitcoin and other cryptocurrencies have plummeted, and some blockchain-based exchanges and currencies are in trouble. For newer investors, who have never been through a crypto “winter”, it’s a scary time.

So how do investors protect themselves as much as possible against the ills suddenly hitting the blockchain ecosystem? How do we reduce our exposure to unhealthy systems or conditions while enabling the exciting opportunities fintech, Web3, cryptocurrencies, Blockchain and related technologies promise?

I believe cryptocurrencies are a new asset class, sitting between stocks and the traditional fallback of gold, while opening endless vistas of new opportunities. That is still true, or will be again after this down cycle.

But it’s also time for the crypto industry to mature and for investors to understand both crypto’s leverage and its harmful components that need to be eradicated. Now is the time to make fundamental changes, both as an industry and as investors, that can build long-term success for everyone.

Believe it or not, the first step is to embrace intelligent and balanced regulation of cryptocurrencies, stablecoins and related sectors. More regulation and centralization in the space has been anathema to many crypto pioneers.

But that is precisely what is needed to solidify a reel market. We have an opportunity to clean up the “diseases” that weaken the growth and use of cryptocurrencies. To achieve this classification as a new asset class, we need smart regulation that establishes safeguards and a better understanding of the oversight role of regulatory agencies such as the Commodity Futures Trading Commission, the Securities & Exchange Commission and the Internal Revenue Service.

Congress is already considering regulation, specifically, or RFI, sponsored by US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY). In a statement, the lawmakers said the RFI “will create a workable structure for the taxation of digital assets and cryptocurrencies and will provide a regulatory sandbox for state and federal regulators to collaborate on innovative financial technologies.”

SEC Chairman Gary Gensler has also called for intelligent regulation of fintech to unlock its power and prevent abuse.

It’s about time. The fintech situation is facing something similar to what traditional finance had to deal with almost a century ago, after the stock market crash of 1929. Due to inadequate consumer protections such as deposit insurance and minimum reserves, hundreds of banks closed after market fears and uncertainty led to devastating runs on their assets. These drives are costing many customers their life savings. Capitalism as a whole seemed in danger of collapse.

There are other comparisons, like this one from Galaxy Digital CEO Mike Novogratz, a prominent long-term investor who pointed to the industry-shattering shakeup after the 1998 collapse of highly leveraged hedge fund Long-Term Capital Management.

Now, some unregulated blockchain companies and investors have practiced the same wildly irresponsible over-exploitation that killed LTCM, or worse, they have been part of other problematic behavior that betrays the confidence of their investors and customers.

Novogratz is right about one thing. The crypto sector is going through another epochal reset. Fortunately, the situation is nowhere near as dire as the 1930s or the foreign troubles that led to LTCM’s collapse.

But the crypto industry is taking a hard hit. To recover and start growing again, the sector needs operational requirements that reassure investors that their money is safe, while giving them the chance to take part in the next-generation opportunities created by Web3, blockchain technologies and cryptocurrencies.

For starters, we need more centralized exchanges. It is something that many long-term enthusiasts almost reflexively oppose. But centralization allows accountability and the ability to enforce so-called KYC/AML (Know Your Customer/Anti-Money Laundering) restrictions that govern the operations of all types of US financial institutions.

KYC/AML helps assure retail investors that their money is protected much higher than we have seen throughout crypto history. KYC/AML systems help weed out the fraud, abuse and theft that has been all too common in crypto’s dark corners.

Investors, meanwhile, must use their type of KYC: Know Your Company. They need to do their due diligence before investing in any company, but especially in a fast-growing, fast-evolving sector like crypto.

Who do you do business with? Some companies, for example, promised double-digit returns when no one else offered much above zero. It’s clearly not sustainable and investors should have known better, but greed got in the way. As we move forward, focus on the large, reputable companies that run real businesses with KYC/AML regulations and face regular audits of their processes.

Customers also need to think about how they invest. Diversification has always been a smart idea. The traditional investment mix was a split of 60-40 shares and bonds. The exact ratio changed according to short-term market changes, with real estate and perhaps some gold or silver investments as another counterbalance.

But during the recent overheated market, people invested in many companies, both in the crypto and stock markets, that had not proven much of anything beyond the ability to publish press releases and throw lavish parties at crypto conferences.

A more balanced approach is still good advice, but now it can be more nuanced, with cryptocurrencies as part of the mix. They just shouldn’t be the whole mix, which is how too many eager novice investors approached the sector.

As Charles Cascarilla, CEO of payment processing firm Paxos put it in a recent interview: “You have to have an all-weather business plan.” This applies to both companies and individuals.

Some say they lost their savings after investing everything in crypto when prices were high; Now they have very little or nothing to show for it. It was not an all-weather business plan. It was hoped that the wind would continue to blow in only one direction, at a comfortable, profitable pace, for years to come. But economic conditions change, often far faster than new investors understand.

You need to spread your investments accordingly and make sure you have guardrails on yourself (like working with reputable companies that don’t promise the moon).

You also have to use something called patience. Warren Buffett has become a billionaire many times over by building around many smart and a few simple rules, such as “buy solid companies you understand and hold onto them for years to come.”

As we move forward, investors face a much more complex market. That doesn’t mean you have to quit and go. This means that you have to be smarter going forward than you have been in recent years.

“The reality is that like stocks, with crypto, all geniuses are in a bull market,” said billionaire Mark Cuban, a frequent crypto investor. “Now that prices are falling for both, those companies that were unnaturally sustained by easy money will disappear.”

With better regulation, more intelligent investors and a cleaned up industry, cryptocurrencies could be a significant part of the future of finance. Novogratz said Bitcoin could play a crucial role in our eventual economic recovery.

“Bitcoin will lead the markets back from this Fed tightening,” Novogratz said. “The moment the Fed backs off, Powell stops because the economy starts to roll over. You will see Bitcoin explode northward.”

The question is whether the government, the industry and the investors have positioned themselves to exploit the benefits in a way that benefits everyone. We are at the beginning of another engineering marvel in Web3 and Blockchain technologies.

The United States must continue to lead and innovate in this next technological paradigm shift affecting the future of money. At the same time, the space must be safe for consumers. Remember, as we doctors like to say, “First, do no harm.”