“Cryptocurrency is a scam. Bitcoin and all these other projects are really just big pyramid schemes, taking people’s money and funneling it to whoever created them.”
I’m sure you’ve heard this before. I’ve probably heard it a minimum of 15 times in the last two months alone, since the market has been rallying and attracting a lot of attention.
Of course, this isn’t true. Cryptocurrency is quickly becoming a widely-recognized and respected asset class, with banks, investment firms, large-cap companies, and even governments adding it to their list of assets.
Having said that, it would be dishonest of me to say that the cryptocurrency space is entirely safe and secure, and that there are no troubles in the market.
In fact, it’s quite the opposite. Despite being a huge proponent of investing in cryptocurrency, it’s actually important for me to accept and admit that there are a variety of risks involved.
Many of these risks aren’t related to cryptocurrency itself, but of the human behavior that surrounds it.
Many people are using this quickly booming industry to take advantage of others, and it’s important that you are adequately equipped to spot these issues before they may affect you. I know these issues well, because I have either witnessed them, or unfortunately been affected by them.
Let me get one thing straight: the most obvious “risk” in the market is volatility.
Cryptocurrency is still a pretty speculative asset class, and that means that it is subject to pretty large price swings. Having said that, market volatility is out of your control.
We can’t control the price of each coin or the general direction of the market on any given day (if we could, we’d all be filthy rich), so in this article we are going to focus on what factors we can control to remain as safe and secure as possible within the market.
Unrealistic Expectations – Beware the Hype
I was sitting on the couch last week with my girlfriend when she suddenly showed me her phone and asked me, “Have you heard about this new cryptocurrency yet?
Apparently it’s going to go up like crazy and make a ton of money for people. Do you think you’re going to buy a little?”
Upon looking at her phone, I noticed that it was a TikTok video. Yes, not the most credible source, but it already had hundreds of thousands of views, and thousands of comments full of enthusiastic young men and women.
It featured a teenage boy explaining that this cryptocurrency, if it reaches $1 per coin, would turn a $1,000 investment into $1M.
There was no explanation of what function the cryptocurrency serves, what the supply was for the coin, or why it may be better than any other of the thousands of existing cryptocurrencies.
With no relevant information, no compelling thesis for investment, why did this attract hundreds of thousands of views? The answer is simple: fear of missing out (FOMO).
FOMO is such a strong force in the investment community, whether in stocks or cryptocurrencies. No one wants to miss out on the opportunity to make money.
Sometimes, that fear of inaction (especially when looking at past performance of other cryptocurrencies) causes people to make rash decisions, such as purchasing in at high prices purely off hype and hearsay rather than spending even ten minutes doing some research.
This is a dangerous cycle, because without doing proper due diligence beforehand, if the price starts falling, you will have no conviction in your decision and will likely sell for a loss due to nerves.
When you see an opportunity like this, and start getting nervous about “missing out,” always revert to the facts. Try to find concrete data that cannot be affected by emotions.
For example, when I heard about that opportunity, I wanted to see if achieving this price was even possible. I saw that there were 100 billion coins in circulation.
This means that if this crypto were to reach $1 per coin, it would be the third largest crypto in the world, following only Bitcoin and Ethereum.
I found this to be extremely unrealistic, given there was no logical explanation online about what function this crypto even served.
This problem isn’t exclusive to TikTok or Twitter, either. If you go on YouTube, where many go for cryptocurrency news, and search “Crypto 20x” you will find a minimum of 10 videos posted in the last week alone that show up in the results with titles like “NEW CRYPTO ALTCOIN 50-100x YOUR MONEY IN 2021!”
By creating content like this, they get viewers incredibly excited to click on the content, because no one wants to miss out on supposedly getting rich.
This drives views and traffic to their pages, which builds their following and makes them money.
Remember that posting “clickbait” and selling dream scenarios to viewers is highly profitable to content creators. It’s their job to sell high hopes and expectations.
But, as a consumer & investor, it’s your job to always put your money first, and never blindly listen to people on the internet.
Getting rich quick usually doesn’t work out for anyone except for the people promoting the scheme.
CoinGecko allows you to search any crypto you are interested in, and immediately find links to their official sites, project roadmaps, community chats, and “white papers” – the documents explaining functionality and economics of each cryptocurrency.
CoinMarketCalendar allows you to see upcoming events for cryptocurrencies such as exchange listings or technical updates, allowing registered users to vote on the legitimacy of these events.
Yes, it is possible to make very large returns in cryptocurrency, but not every project will succeed, and not every single one will increase exponentially, like others. Always try finding factual information rather than relying on your emotions when you see a new opportunity in cryptocurrency. Use this information to level your expectations so you don’t expect overnight riches. It may take time, and you may not initially be in profit.
Newer Cryptocurrencies- Multiply Your Account or Go Bankrupt
Many people look at newly-created cryptocurrencies as a way to exponentially increase their wealth.
They believe that getting into a crypto at the very beginning is how to achieve a 50-100x gain that could not be achieved by investing in cryptos like Bitcoin or Ethereum, which don’t have as much room to grow.
The reasoning behind this is that a new crypto with a market cap of $50M could theoretically 20x your initial investment if it were to grow into the billions, and that is far more “attainable” than something already worth $10B growing into a $200B market cap.
However, the odds of success among the small cryptocurrencies are not in your favor.
Let’s look at this from a business standpoint: as of 2019, National Business Capital and Services reported that 90% of startups fail.
It’s important to think of new cryptocurrencies sort of like startups and new businesses. These are early-stage projects, led by a team with a novel idea, and they are trying to raise capital and bring it to the market.
They have potential for huge growth. However, potential and an idea doesn’t mean proper execution, scaling, and success.
I was recently reading an article on what steps it takes to create a new cryptocurrency, and one thing really stood out to me.
The article was from 2018, and it mentioned that there were 895 coins recognized by CoinMarketCap, a leader in cryptocurrency market analytics. If you go on the website today, you’ll see that there are over 9,000 cryptocurrencies listed.
In fact, at the time of writing (April 2021) there were 14 new cryptocurrencies created since I started writing this article yesterday.
There simply isn’t enough money in the world to support this many cryptocurrencies and turn them all into multi-billion-dollar projects.
It would be impossible for all of these cryptocurrencies to follow the same trajectory, on parabolic runs upward, providing massive returns to early investors.
If you’re new to the cryptocurrency space (less than 1-2 years of experience) I would recommend avoiding new projects altogether.
I have invested in some of these earlier-stage cryptocurrency projects, and although a few have achieved solid returns for me, others have dumped in price very hard (50-80%), and it can be hard holding projects throughout periods of high volatility.
If you can’t stomach these huge waves in price, you may end up selling a project before it finally rises in value, anyway.
In fact, if your goal by investing in cryptocurrencies is to grow your wealth consistently over time (which it should be), it may sense to stick to larger, more trusted and proven projects.
Typically, investors allocate larger amounts of capital to higher-conviction plays, so it may make sense to aim for slightly lower returns on higher initial investments, and removing some risk by avoiding these highly speculative investments altogether if you are aiming for the same amount of net profit regardless.
Pump and Dump Schemes
Of all the issues listed in the article, this is probably the one most likely to affect you. I know this because it has affected me, and many other friends.
It’s usually pretty inconspicuous, and those who conduct pump-and-dumps are usually very good at framing their schemes in a manner where it seems like they are trying to help you.
Pump and dump schemes are pretty much exactly as they sound.
Someone (or a group) purchases a large amount of a small cryptocurrency while it is at a very low price, then spreads a lot of misleading information around various channels such as YouTube, Telegram, Discord, or StockTwits.
These followers buy in, “pumping” the price up as demand rises, and then those who conducted the scheme will “dump” their large investment now that it has become profitable.
I recently joined a Discord room for cryptocurrency investors.
I thought we would be discussing fundamental events in the cryptocurrency space, and scouting out good opportunities. However, I noticed very quickly that the ringleader of this group started posting about two cryptocurrencies with market caps around $20M, that were recently created.
He said that these prices are going to “explode” soon (they always use language that is very extreme) and that you must get in now before the price “skyrockets.”
Let me do some simple math to illustrate this to you: this community has over 100,000 members.
Even with an average buying power of only $100 for a cryptocurrency, this would add $10M to a project that might only have a market cap of $20M. This can lead to drastically large price changes.
One thing to look out for to prevent falling for this is market capitalization. This, much like for stocks, is the price per asset times the supply. These can easily be found on CoinMarketCap.
These schemes typically happen on small-cap projects. It’s a lot harder to move the price of Bitcoin, when the total supply is worth over a trillion (yes, trillion with a “T”) dollars, versus greatly moving the price of a crypto whose supply is only worth $20M.
I would always suggest researching individuals to get a grasp on their reputation, or reading comment sections from people posting on YouTube, Twitter, or any other platform where large names talk about cryptocurrencies.
Although many content creators put out valuable, informative work, there will always be people who try to take advantage of others for personal gain, and fortunately the community is pretty open about calling out these situations.
If something sounds too good to be true, it probably is.
Takeaways for Staying Safe In Crypto
The two most important traits you can practice while investing in cryptocurrency are skepticism and moderation.
Let’s talk about skepticism first. This might sound ironic, because those who are overly skeptical and cautious about many things in life are typically the first to entirely denounce cryptocurrency, but let me explain myself.
The reason why I think it’s important to lean toward the side of being skeptical, rather than euphoric and naïve, is that the risk to reward ratio suits most people much better.
It’s a lot easier to sleep at night when you’re not constantly afraid of your investments plummeting in value. That peace of mind is not possible when you are blindly investing in high-risk, new cryptocurrencies you don’t fully understand.
Yes, if you’re very cautious, you might write off an opportunity to invest in a small cryptocurrency that might go up wildly, say 300-500%.
Sometimes that hurts to see; I have kicked myself over not investing in projects that would have returned my initial investment five times over
However, it definitely hurts to potentially lose 60-80% on an investment because you jumped in too quickly, not conducting research, and trying to chase the hype that has already driven a project up in price.
This will shake up your confidence in future investments, and may make you too reluctant to enter good opportunities in the future.
As much as it can be difficult to do, always ask yourself, “is this realistic?” when you hear price predictions so you don’t feel tempted to overexpose yourself to any investments, putting in more money than you should at hopes of hitting the jackpot.
Hopes and wishes aren’t what make investment goals come true. Research, patience, confidence, and unfortunately, sometimes luck, are what make successful investments in cryptocurrency.
Aside from practicing moderation in your investment choices by not only choosing very small, volatile projects hoping for massive returns, it’s also important to practice moderation in the amount you choose to invest.
The phrase “only invest what you can afford to lose” is very popular for a reason. Don’t be like the man who lost all of his savings, irresponsibly investing it all during the last crypto bull run.
Cryptocurrency is a wildly exciting space. It seems as though every single day, we are seeing more news come out about how the sector is either evolving, or being implemented into legacy businesses to help change how business and finance is conducted globally.
Having said that, you can’t let this excitement overwhelm you and cloud your judgment to the point of treating the cryptocurrency market like a casino.
The cryptocurrency market is still young, and there is plenty of potential for growing your wealth, but we still must follow basic principles of investing for long-term success.
If you keep your expectations unreasonably high, and jump at every opportunity trying to create overnight wealth, you may make poor decisions trying to turn those lofty goals into reality.