Getting into crypto can be a painful (and expensive!) process.
Thankfully, crypto veterans have already made these mistakes so that you don’t have to.
Bitcoin keeps on climbing, the altcoin market is set to explode, and you’re itching to jump into the world of crypto trading. Cryptocurrency is a life-changing opportunity for many of us. But it is so easy to make a mistake, especially when you’re a rookie.
Luckily for you, crypto veterans have already made these mistakes, so you don’t have to.
There are also plenty of online brokers offering slick mobile apps that allow you to buy and trade crypto along with other commodities. Now you can even “buy” cryptocurrency using Paypal! But many people trade on exchanges.
1. Don’t Get Screwed By The Exchanges
Newcomers to the cryptocurrency market might be a little overwhelmed with the choices on offer. There are centralized exchanges, like Coinbase and Binance, decentralized exchanges, like Uniswap, and Peer2Peer exchanges, like BISQ.
This level of choice is good but it can leave your head spinning a bit. Before you make your decision about how you want to buy cryptocurrency, you should decide why you want crypto:
- HODLing: Most crypto investors are also HODLers, or people holding crypto for long term gains. If this is you, make sure you use an exchange where you can take crypto into your private wallet. (Watch out for the withdrawal fees; they can sting.) These users will likely want to look at Coinbase, Uniswap, Kraken, or Binance.
- Day Trading: Some users will want to try to play the markets. This is risky, but it can get you rewards. If this is your plan, make sure to check what the fees on individual transactions are, and pick an exchange like Binance or Coinbase with plenty of liquidity. In a pinch, decentralized exchanges like Uniswap could work.
- Spending it: Spending crypto is still a niche use case, often (unfairly) associated with Illicit activities. However, that could soon change when Paypal opens up cryptocurrency payments to their merchant network. For the moment, Paypal will be your main choice unless you want to buy a VPN subscription.
Whatever you want your crypto for, you need to make sure you understand the terms you’re trading on. Fees can vary wildly between exchanges. Apart from that, scams are not uncommon on P2P trades. Be particularly cautious of sites offering crypto for fiat purchases, and nothing else. They tend to offer significantly worse rates than going through the “know your customer” (KYC) procedures on an exchange would.
2. Not Your Keys, Not Your Crypto
Most of you will likely end up using an exchange at some point in your crypto journey. One thing you will quickly notice is that exchanges offer their own wallets. This is very useful if you’re planning to regularly trade cryptocurrency. But it comes with some significant risks.
Cryptocurrency wallets utilize private and public keys. The owner of the wallet is the one who holds the private keys. If you are utilizing an exchange wallet then that is technically not you. The exchange itself creates and controls the wallet. If you chose to leave your cryptocurrency in an exchange, then you could risk losing it in a hack. This happened to KuCoin in September 2020.
You should also be wary of losing wallet access. The internet is littered with stories of people who have lost Bitcoin, including the man who literally threw away $127 million in Bitcoin. Careless or forgetful Bitcoin HODLers have to date lost around 3 million Bitcoins, or over $68 billion. Make sure to keep your keys stored somewhere safe, and that your loved ones know how to access it if something happens. To paraphrase Gandalf, “Keep your password secret, keep it safe.”
3. Educate Yourself Before Buying
The urge to dive in and get going is understandable. But it is risky. It’s important to understand what you’re buying, which means setting aside a little time for research. A good place to start is the Bitcoin Wiki, which contains some useful insights. If you want to look at other projects, a good place to start is their personal websites and online communities. Reddit’s cryptocurrency and crypto-specific subreddits can be helpful here.
4. Understand the Fear and Greed Index
Caveat: We are not in the business of investment advice. Any money you gain or lose is a result of your own decisions and if you’re taking your investing advice from internet talking heads, please go see a CFA or CPA before putting any money down.
With that out of the way: The crypto market is fueled by emotions. These are measured, to some degree, by the fear and greed index. When the market is in a bull run, people tend to experience strong fear of missing out (FOMO) and this can lead to buying at a market peak, which happened to many of us in 2017. We’re seeing a major bull-run right now so the needle is pointing to the “greed” side of the index.
Now might not be the best moment to buy. If we see a sudden crash (unlikely, but plausible) you could find yourself holding some very heavy bags. That being said, if you believe in the long term prospects of crypto, go ahead and dive in. Just keep in mind that you might be waiting a while.
5. DON’T INVEST MONEY YOU CAN’T AFFORD
As we’re now in the greed cycle we see more tweets like this:
He is right. Crypto is still a highly volatile asset. There is a reason banks typically won’t give out loans for high-risk activities. Because they are risky!
The same logic applies to putting your life savings in cryptocurrency. If you need that money to live, you could find yourself staring down the barrels of bankruptcy.
Crypto can be a life-changing opportunity. But never, ever, invest money that you can’t afford to lose.