The Loopring (CCC:LRC-USD) cryptocurrency has given investors a quick and painful lesson that is a combination of the classic “buy the rumor, sell the fact”, extreme speculation sentiment, and invest in what you know.
Readers of my articles on meme stocks like Gamestop (NYSE:GME) know that I do not like them. They often sport very poor fundamentals, excessively high valuations, and stock market manipulation concerns. Loopring soared on business news and rumors associated with Gamestop’s plans to launch its non-fungible token (NFT) trading platform utilizing the Loopring blockchain network.
GameStop announced the blockchain network Immutable X (CCC:IMX-USD) as the developer for its NFT marketplace rather than Loopring and back in November 2021. In response LRC-USD tanked from nearly $3.4 to approximately 40 cents in late October 2021.
By December 2021 LRC-USD had declined steadily and the latest price as of Feb. 4, 2022, is 89 cents.
Lessons Learned From the LRC-USD Rally and Selloff
What are the lessons investors should remember or learned the hard way from the Loopring Selloff? I already gave a glimpse above, but here is a more analytical perspective.
- Invest in what you know.
- Investing in cryptocurrency coins or tokens starts from a very core concept: not all blockchain networks are the same.
- Take for example any stock. What does the company do as its main business? Then go to any cryptocurrency and read its whitepaper. In most cases, it is a lengthy document filled with marketing ideas, hopes, data, and terms that can be highly technical. You’ll probably need further study to get the whole idea behind them.
- Late last year, Loopring investors did exactly what you should never do: invested, and worse, speculated, without knowing the fundamentals of a cryptocurrency. Not a wise decision.
- Speed is of paramount importance in trading highly volatile financial assets.
- High stress is often included too.
- Can you handle the adrenaline of being on the right side of trading, buying when prices surge? Feel the happiness of generating smart and easy money? What if you flip on the other side, buying near the top, and become part of the “greater fool strategy”?
- The fear of missing out (FOMO) is dangerous.
- FOMO trading at some point ends with wild price swings that can disappear quick profits at warp speed.
- LRC-USD surged fast, but also declined fast.
- Whenever a financial asset is rising at a 90 degrees angle on a chart it’s skyrocketing. So be prepared for either a consolidation or a selloff as profit-taking inevitably will kick in.
- News is the key driver for volatility in any financial market.
- Especially for the cryptocurrency market!
- Always dig deeper behind the headlines.
- It is a highly speculative market where news should be assessed with a higher degree of skepticism compared to more established markets such as stocks, or a bond on the Forex market.
- Slow down, and think.
- Speculation and greed can lead to biases in investing, namely overconfidence and loss aversion bias.
Loopring and Gamestop
Another aspect worth mentioning is that Loopring made headlines and surged in 2021 related to news not to just any random company, but to Gamestop. As you might recall, GME stock was among top meme stocks of 2021. There was quite a frenzy about buying stocks suggested by the “wisdom, speculative predictions and complete lack of professional credentials” of social media forums.
I didn’t know anything about Loopring before reading more about this funny story with Gamestop. I claim it is a funny story because investors knew that Gamestop had a business that was questionable, a stock price that was inflated, and most of all would try to invest ways to survive and prove it would reinvent the wheel in modern business strategy. Of course, launching an NFT marketplace could work but it is highly questionable to my analysis. Having already a history of stock price manipulation by social media forums and a collapse of its stock price Gamestop would be enough to create a negative and sustainable sentiment to sophisticated investors to avoid any other relationship with it.
It seemed that speculation is a very hard habit to ignore and Loopring was another recent example of irrational trading activity.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.