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If you’re just starting to look at cryptocurrencies and wondering whether to invest, here are 10 things you need to know before you buy.
Even if you are an experienced cryptocurrency investor, if you meet someone new who is ready to enter the market, please share this article with him/her.
1. Don’t invest more money than you can afford to lose
Cryptocurrency is riskier than many other investments. Nothing is guaranteed except volatility. What's more, it's unregulated for the most part. There's no FDIC insurance, and there's no buyer of last resort. Cryptocurrency prices fluctuate wildly from moment to moment. While the market is basking in the glow of a bull run, it has already seen painful and prolonged corrections, and will almost certainly have more.
The degree of danger varies. Bitcoin, the original cryptocurrency, has been around for more than a decade and is much less likely to disappear than most other coins. But it is not without risk.
Therefore, do not bet your fortune or your life savings on any coin.
2. In-depth research Before you invest a lot of money in any cryptocurrency, spend hours researching the technology so you understand its value proposition and risks. (“Someone will definitely come along” is not a value proposition.)
Read everything you can find on the subject. Lurk in community forums and developer mailing lists, and listen to podcasts. Get books from the library, not just about cryptocurrency, but about related fields like cryptography, game theory, and economics.
If the situation in your area has improved, go to a local meetup. Ask questions, and don’t be afraid to ask others if you don’t understand what you hear. If you still don’t understand, don’t assume it’s your fault; people may just not be explaining it in a clear and understandable way. Genuine people will take the time to help you, but even so, be wary of people asking you to buy a token.
Even if you are convinced, seek out people who hold opposing views and listen to their perspectives. Remember John Stuart Mill’s famous words: “He who is conscious of his own opinion knows little of it.”
Once you think you've researched everything there is to know, it's not that easy to keep digging deeper.
3. Resist the fear of missing out (FOMO) If your only reason for investing is to avoid missing out, you will almost certainly end up losing everything.
The fear of missing out (FOMO) is a surefire way to ruin your years of accumulated wealth. The problem is, it’s an instinctive reaction, so do your research. Trading based on your gut instinct is likely to make you regret it.
Understand the underlying asset you are buying. Seeing a currency on a trading app appreciate by about 30% in the past 24 hours is not something worth investigating. Don’t blindly buy into a currency that is skyrocketing without understanding it.
Every coin has its share of enthusiasts, even Bitcoin. Don’t give in to peer pressure and blindly follow others. This isn’t high school. Think for yourself and evaluate the merits of your investment.
Research, study, and research again!
4. If it's too good to be true, it's fake. Cryptocurrency is full of charlatans, just like Wall Street, the U.S. Congress, or the American Bar Association. There are enough people who promise that their projects will surpass Bitcoin. But is it really so? There is only one way to know, and that is to investigate.
Be careful when buying! Be careful with leverage! Some cryptocurrency exchanges offer over 100x leverage, which means you can borrow up to 99% of your investment cost. If the token skyrockets, your profits will increase, but if it plummets, you will be wiped out quickly.
5. Don’t believe it easily, verify it!
Scammers abound in this market. Just last weekend, some rogues on Twitter took advantage of Elon Musk’s appearance on the TV show Saturday Night Live to scam people out of $100,000 worth of various cryptocurrencies with fake “giveaways.” Impersonating the comedy show’s Twitter account, the criminals instructed victims to send a small amount of cryptocurrency to verify their address. If they did so, they would get 10 times the amount back.
This too-good-to-be-true luck is a danger sign, be on your guard!
6. Beware of “Unit Bias”
A token priced at $1 does not mean it is cheaper than Bitcoin, which is worth $58,000.
There are thousands of cryptocurrencies on the market, some are imitating Bitcoin, some are trying to solve other problems, and they all have varying degrees of developer community support and decentralization. The value of a token depends on how and why it was created. What is its utility? Who is working on it? How big is the developer community? How active is the codebase? Are updates to the open source software recorded and synchronized on Github? A project is like a building, and the codebase needs to be maintained, otherwise it will make its structure unsound.
Most importantly, what is the security model of the token? PoW, PoS, or something else? If PoW, what about the network hashrate? If you don’t know what these mean, you are not ready!
7. Without the private key, there is no real ownership of the token. Cryptocurrency is a bearer asset similar to cash or jewelry, which means that the holder is considered to be its legal owner. Once it is lost or stolen, it is gone.
This is why advanced users will advise you not to entrust the cryptographic keys of your cryptocurrency wallet to a third party, such as an exchange, because these companies are largely unregulated in many places and may be hacked or absconded with funds. DeFi platforms have been heavily attacked in the past 10 months, and so have centralized platforms such as Binance.
However, keeping your private keys on a hardware wallet or paper wallet can be a hassle, which is why experienced investors prefer using third-party custody.
Many issues in the cryptocurrency industry are trade-offs. Do you trust yourself not to lose your private keys or mnemonics? If not, you have to trust someone else to hold them, and history has given you all kinds of reasons not to do so.
In order to reduce the risk, there is also a multi-signature wallet that can be configured to require n people to sign together before the funds in the wallet can be used. However, this is relatively complicated for newcomers.
In addition to being attacked, exchanges may also be unable to perform at any time for this reason, such as solvency issues or related legal disputes. Even some exchanges simply do not have good enough infrastructure to maintain the normal operation of the system, such as Coinbase and Robinhood often fail during periods of market volatility. If you do not hold the tokens yourself, you cannot guarantee that you have control over your tokens.
That said, there are many reasons why you might want to use an exchange, so it’s important to check the user agreement and make sure you’re protected against different eventualities.
8. You can buy fractional amounts of Bitcoin (and other tokens as well)
Tokens can be purchased in small amounts, such as Bitcoin, which can be subdivided to eight decimal places. So if you are interested in a certain token, you can try to buy $10 and play around with it.
Billionaire Mark Cuban recently said on television about buying a small amount of Dogecoin: “This is a lot better than buying lottery tickets.” Unfortunately, he also encouraged viewers to buy goods with Dogecoin without mentioning the tax implications.
9. Understand the tax consequences
This is particularly important in the United States for several reasons. First, the IRS considers cryptocurrency to be property, not currency, and therefore taxable. As a result, if you buy a coin for $1 and it doubles in value, and you spend the extra $1 on a pack of gum, you will need to report this capital gain and pay tax. Despite lobbying efforts by the cryptocurrency industry, there is no "de minimis exemption".
Additionally, centralized exchanges regularly send account information to the IRS. Of course, cryptocurrencies are not regulated like stocks or banks. However, the federal government is running a huge deficit and will not hesitate to send someone to visit you to ask about your cryptocurrency transactions.
10. Use dollars to calculate average costs, don’t obsess over prices Go out for leisure, breathe fresh air, exercise, enjoy the sunshine, spend more time with your family. Then invest in cryptocurrency.
The market is always fluctuating, and we should have a long-term investment mentality. If you want a dopamine rush, go for a run or watch an action movie.
What is the best way to invest? That is to use dollar cost averaging (DCA). Buy a certain amount of any cryptocurrency you like every once in a while and then don't look at it. If you have a long-term view, if you use DCA, you will not be forced to sell or increase your position due to short-term fluctuations.
The purpose of this article is not to scare anyone away from this fascinating and potentially transformative industry, but to ensure that they approach it with a wary and cautious mindset.
It’s never wrong to invest cautiously! |
