This longtime crypto investor lost $20,000 in the Celsius collapse. Here is his advice on risk management

Brad Hart lost $20,000 overnight.

Like other crypto investors, Hart took a permanent loss when cryptocurrency lending platform Celsius Network went down earlier this summer.

“I was under the impression that they were a stable lending platform that charged one price to lenders and another to borrowers,” says founder and investor Brad Hart. “They gave a spread to investors I thought was reasonable.”

Hart has been investing in cryptocurrency for the past decade and says that if he had known the kind of risk Celsius was taking, he wouldn’t have invested his money with the lending platform.

Hart’s experience is a good example of the risks that come with cryptocurrency. Even experienced investors have lost large sums this year. That’s why experts say it’s important to only invest in crypto what you can afford to lose, even if you’ve been investing for a long time.

Celsius was known as an experimental cryptocurrency bank with more than one million customers that offered returns as high as 18% to investors willing to lend their crypto on the platform. When cryptocurrency prices fell in June, the firm entered a liquidity crisis, announcing it was freezing withdrawals “due to extreme market conditions.”

The announcement sent Celsius into a full-blown meltdown, and within weeks it filed for Chapter 11 bankruptcy. Celsius is now on track to run out of cash by October and owes users about $4.7 billion, according to the bankruptcy filing. Celsius did not respond to NextAdvisor’s request for comment.

Here’s what Hart learned from the experience, along with his advice for anyone considering investing in crypto:

How Hart started investing in crypto

Hart’s introduction to cryptocurrency was in 2009 – the year bitcoin was created. He invested about $2,000 a year in crypto from 2010 to 2015, keeping an eye on crypto’s rapidly diversifying market.

By 2015, Hart had purchased a significant amount of ethereum, along with litecoin and bitcoin. With such a large portfolio, Hart followed expert advice and kept his coins on cold wallets such as Ledger and Trezor. A cold wallet, otherwise known as a hardware wallet or cold storage, is a physical device that keeps your crypto completely offline.

Hart switched to dollar cost averaging for crypto from 2015 to 2017, increasing his investment to about $10,000 a year. He developed a bucket strategy for his investments – a safety bucket, risk bucket and growth bucket.

“In the growth bucket, I invested in stocks,” says Hart. “In the risk bucket, it was mostly crypto. At one point, crypto had grown so much that it was a large part of my net worth. I realized that I needed to sell some of it because it was also a huge amount of my net worth, and I felt me unbalanced risk-wise.”

Hart bought on centralized exchanges and moved the crypto to cold wallets. He also funded his Roth IRAs annually, accumulating $80,000 in stocks and index funds. Hart sold some ethereum and bought a house in 2021 for $490,000.

Celsius crash and get banned

In 2021, companies like Celsius started offering high returns for investing in crypto on their platform.

Celsius allowed investors to deposit cryptocurrency into the Celsius app, and the company then lent their cryptocurrency to retail and institutional borrowers. Every Monday, customers would receive a payment from Celsius’ earnings from these loans. Celsius announced that 80% of its revenue went to users, and it offered 3% to 18% returns for investors. Celsius rates varied depending on the currency and other factors – about 3% to 8% on bitcoin, 4% to 7% on ether, 9% to 11% on tether, and so on.

The high return convinced Hart to loan $96,000 worth of bitcoin to Celsius, along with some other smaller altcoins. He had no idea how Celsius was leveraging itself for its lending platform, so when the firm started to take off, he realized he was “taking too much risk and it blew up for everyone.” Celsius paid Hart back for most of the loan, but he lost $20,000 of his original investment.

“What I had left after the loan was paid off is still in the account. I can’t get access to it and probably never will,” says Hart. “The crazy thing is that they were willing to give loans, and I was okay with those loans because they were pretty cheap. They should have known better, but everyone should have known better.”

In mid-April 2022, the platform began to show signs of trouble when it began holding non-accredited investors’ coins in custody, and investors could no longer add new assets or earn rewards. Things took a turn for the worse in the following months.

About $300 billion was wiped from the crypto market in May after stablecoin TerraUST (UST) and its sister coin LUNA collapsed. And in mid-June, Celsius had frozen its withdrawals, swaps and transfers amid a crypto market crash, with the company saying the assets of 1.7 million users would remain frozen indefinitely.

When Celsius began to show signs of trouble, Hart tried to recoup his investment. Hart could see Celsius selling the crypto in his account to cover his loan, but he couldn’t move money in or out of the platform. He tried to contact Celsius several times and sent several emails, but never got a response.

“I realized I had a good run and should sell what I had invested, but I got busy and just didn’t,” says Hart. “I’m not crushed, but it sucks.”

An experienced crypto investor’s advice

The sudden and rapid collapse of Celsius was a reminder of how risky the crypto industry can be. Unlike the traditional stock market, there are no robust federally mandated protections in place for crypto investors. It remains unclear whether any investors will get their money back from Celsius, and Hart remains banned from his account.

Hart has written off his losses, but doesn’t want the same to happen to other investors, especially those who are just starting to invest in crypto. Here’s Hart’s advice on navigating the volatile crypto market:

Don’t risk money you can’t afford to lose

Crypto should be in your risk bucket when it comes to investing, making up no more than 5% of your total portfolio, according to Hart and dozens of other experts we spoke to. Hart suggests picking a few coins that you believe have long-term utility and value, and investing only what you’re OK with losing. Since many crypto projects are new and speculative in nature, the money you put in should be categorized as risky investment, meaning it is high risk and high reward.

“In 1998, the internet was where blockchain technology is now,” says Hart. “Google was one or two years old, Amazon was four years old, and Facebook didn’t exist yet.”

Get to know crypto wallets

Hart recommends buying crypto on trusted, popular exchanges and then moving your coins to a cold wallet where you own the keys. You should also spread crypto out between several cold wallets if you have a lot of money invested, he says. Based on our own research at NextAdvisor and input from the experts, these are the best crypto wallets for long-term investors.

Consider splitting up the cold wallet seed sets and never having them in the same places. Hart says that the seed sentences, which are a series of words generated by your crypto wallet, should only be written on paper and stored in a safe place because it acts as a password. “You will never have that seed phrase seen by anyone or ever stored on a digital device,” he says.

Consider dollar-cost averaging your crypto investments

For crypto investors, volatility is a fact of life. But there is an old strategy for these new investments that can help protect you from the ups and downs.

Hart says dollar cost averaging, a classic investment strategy where you make regular investments throughout the year, can be a safer way to invest in crypto.

Dollar cost averaging, like any strategy, will only be a good one if your investment increases in value over time. Crypto is still a new, highly speculative asset, so it is hard to know if it will be a profitable investment in the future. Most experts suggest sticking with bitcoin and ethereum — the two most valuable and common cryptocurrencies — when dollar-cost averaging crypto, unless you’re okay with more risk.

A sudden failure of your crypto investment, like what Hart experienced with Celsius, can leave you feeling burned and hesitant. It is therefore important to develop a long-term investment strategy that balances risk and safety, so that you are better equipped to stay the course when setbacks occur.