Newcomers entering the market to buy coins? Ten things you must know!
If the only reason you invest is to avoid missing out, then you will definitely end up losing everything.This article is from the Chinese version of CD.
If you are just starting to pay attention to cryptocurrencies and wondering whether to invest, here are 10 things you need to know before buying.
Even if you are a seasoned cryptocurrency investor, please share this article with newcomers who are preparing to enter the market.
- Don’t invest more than you can afford to lose
Cryptocurrencies are riskier than many other investments. Aside from volatility, nothing is guaranteed. More importantly, it is largely unregulated in most cases. There is no insurance from the Federal Deposit Insurance Corporation, nor is there a last buyer. Cryptocurrency prices are in constant and severe flux. While the market may be basking in the glow of a bull market, it has also undergone painful and prolonged corrections, and it is almost certain that more will come.
The level of risk varies. Bitcoin, the original cryptocurrency, has been around for over a decade and is much less likely to disappear than most other tokens. But it is not without risk.
Therefore, do not stake your property or life savings on any token.
- Do your research
Before you invest a significant amount of money in any digital currency, spend hours researching the technology to understand its value proposition and risks. ("Surely someone will come to pick it up" is not a value proposition.)
Read everything you can find on the subject. Lurk in community forums and developer mailing lists, listen to podcasts. Borrow books from the library, not just about digital currencies, but also about cryptography, game theory, and economics. Reading related articles from CoinDesk and even some of our competitor media is also acceptable.
If the pandemic situation has improved in your area, attend local meetups. Don’t hesitate to ask questions if you don’t understand what you hear, and don’t be afraid to seek clarification from others. If you still don’t understand, don’t assume it’s your fault; people may just not be explaining it clearly enough. Sincere individuals will take the time to help you, but even so, be wary of people pushing you to buy a particular token.
Even if you are convinced, seek out some opposing viewpoints and listen to their arguments. Remember the quote by John Stuart Mill: "He who knows only his own side of the case knows little of that."
Once you think you have researched everything you need to know, continue digging deeper; it’s not that simple.
- Resist the "fear of missing out (FOMO)" emotion
If the only reason you are investing is to avoid missing out, you will surely end up losing everything.
The fear of missing out (FOMO) can destroy the wealth you have accumulated over the years. The problem is that it is an instinctive reaction, so we need to prepare ourselves with research in advance. Most trades based on your gut instinct will leave you regretting your decisions.
Understand the asset you are purchasing. Seeing a currency appreciate by about 30% in the past 24 hours on a trading app is not a reason to jump in without research. Don’t mindlessly chase after a token that has surged without understanding it.
Every token has its promoters, even Bitcoin. Don’t succumb to peer pressure and choose blind faith; this is not high school. Think independently and evaluate the merits of the investment.
Research, research, and research again!
- If it sounds too good to be true, it probably is
Like Wall Street, Congress, or the American Bar Association, the cryptocurrency space is rife with charlatans. There are enough people promising that their projects will surpass Bitcoin. But is that really the case? There’s only one way to find out: investigate.
Be cautious when buying! Be cautious with lending leverage too! Some cryptocurrency exchanges offer leverage of over 100 times, meaning you can borrow up to 99% of your investment cost. If the token skyrockets, your profits will increase, but if it crashes, you will quickly face liquidation.
- Don’t take things at face value; verify!
There are plenty of scammers in this market. Just last weekend, some rogues on Twitter exploited Elon Musk's appearance on "Saturday Night Live" to scam people out of $100,000 worth of various cryptocurrencies with fake "giveaways." These criminals impersonated the Twitter account of the comedy show, instructing victims to send a small amount of cryptocurrency to verify their address. If they did, they would receive tenfold returns.
This unbelievable luck is a dangerous signal; stay alert!
- Beware of "unit bias"
A token priced at $1 is not necessarily cheaper than Bitcoin, which is valued at $58,000.
There are thousands of cryptocurrencies in the market, some mimicking Bitcoin, while others attempt to solve different problems, each with varying levels 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 researching it? How large is the developer community? How active is the codebase? Are updates to the open-source software documented and synchronized on GitHub? Projects are like buildings; the codebase needs maintenance, or it will become structurally unsound.
Most importantly, what is the security model of the token? PoW, PoS, or another mechanism? If it’s PoW, what is the network’s hash power? If you don’t know what these mean, you are not ready!
- Without owning the private keys, you don’t have true ownership of the tokens
Cryptocurrencies are anonymous assets similar to cash or jewelry, meaning the holder is considered the legal owner. Once it is lost or stolen, it is gone.
That’s why advanced users advise against entrusting the password keys of your digital currency wallet to third parties, such as exchanges, as these companies are largely unregulated in many places and may be subject to hacking or exit scams.
In the past 10 months, DeFi platforms have faced numerous attacks, and centralized platforms like Binance have as well.
However, storing your private keys on a hardware wallet or paper wallet can also be a headache, which is why experienced investors prefer to use third-party custodians.
Many issues in the cryptocurrency industry are trade-offs. Do you trust yourself not to lose your private keys or recovery phrases? If not, you have to rely on others for custody, and history has given you many reasons not to do so.
To mitigate risk, there are multi-signature wallets that can be configured to require n individuals to sign before funds in the wallet can be accessed, but this is relatively complex for newcomers.
In addition to facing attacks, exchanges may also become inaccessible for various reasons, such as solvency issues or legal disputes. Some exchanges may simply lack the robust infrastructure to maintain normal operations, as seen with Coinbase and Robinhood frequently experiencing outages during market volatility. If you do not hold the tokens yourself, you cannot guarantee control over them.
That said, there are many reasons you might want to use an exchange, so it’s important to check the user agreements and ensure you are protected against various possibilities.
- You can buy fractional amounts of Bitcoin (and other tokens)
Tokens can be purchased in fractional amounts; for example, Bitcoin can be divided down to eight decimal places. So if you are interested in a particular token, you can try buying $10 and just play around with it.
Billionaire Mark Cuban recently mentioned on television that buying a small amount of Dogecoin is "much better than buying a lottery ticket." Unfortunately, he also encouraged viewers to use Dogecoin to buy goods without mentioning the tax implications.
- Understand the tax consequences
This is especially important in the United States for several reasons. First, the IRS considers cryptocurrencies as property, not currency, so taxes are required. As a result, if you buy a coin for $1 and its value doubles, and you spend that extra $1 to buy a pack of gum, you need to report that capital gain and pay taxes. Despite efforts from the cryptocurrency industry to lobby, there is no "minimum 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 massive deficit and will not hesitate to send someone to ask about your cryptocurrency transactions.
- Use dollar-cost averaging to calculate your average cost, and don’t get hung up on prices
Get outside, breathe fresh air, exercise, enjoy the sunshine, and spend more time with family. On that basis, then invest in cryptocurrencies.
The market is always fluctuating, and we should have a long-term investment mindset. If you want a dopamine rush, go for a run or watch an action movie.
What is the best investment strategy? It’s to use dollar-cost averaging (DCA). Purchase a certain amount of any cryptocurrency you like at regular intervals, and then don’t look at it.
If you have a long-term perspective and use DCA, you won’t 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 they enter with a cautious mindset.
Invest carefully; it never hurts!
