Which crypto should I buy? How do you spot a crypto scam? (Explain Like I’m 5)
I’ve been hearing about crypto exchanges. Are they just like the stock exchange?
Not exactly, but they are very similar.
How are they different, Cryptoman?
Well Rookieboy, first of all, you don’t need a broker to trade crypto.
Do you own any stock?
Yes, Apple, and Microsoft?
How did you buy them?
Fine. Etrade is a broker, who holds the stock on your behalf and trades it on the NYSE for you. Well if you want to trade crypto, you do not need any help from Etrade. You can have an account directly with the cryptocurrency exchange.
So can I just sign up and trade my crypto?
Sure as long as the exchange handles the type of crypto you want to trade, you can sign up and trade the crypto you keep in your wallet.
So some exchanges don’t trade all of the crypto currencies?
None of them trade all the cryptocurrencies, there are way too many. A big exchange like Binance which tries to cover a really broad range only does 359.
So how many cryptocurrencies are there?
No-one’s quite sure and anyway new ones are born every day. Coinmarketcap.com shows 1605. There are probably more than that.
Are some of them are scams?
Yes. Quite a few are dubious and there have been some notable scams. Bitconnect was probably the most brazen. Also try googling Pincoin, OneCoin, Plexcoin and Centratech. In fact google “crypto scams” and see what comes up.
How can you tell if a coin is a scam?
Research is the only way I know. And it’s not too difficult to do. Visit the web site, read the FAQs, read the white paper — and visit several, so you can compare.
For the sake of amusement you could also visit Useless Ethereum Token (UET). It claimed to host the “world’s first 100% honest Ethereum ICO.” It promised “no value, no security and no product. Just me, spending your money.”
Remarkably some people put money into this and it now has a market cap of $53,240. In February this year its market cap shot up to almost $1 million.
No amount of scientific research will ever explain this phenomenon.
What else should I look for?
If you really want to invest then, if the coin that interests you has already launched, just look it up on Coinmarketcap.com. Take a look at the clip I took from that site, below. Safe Exchange and Rock have very low volume. If a coin’s trading volume is always low its probably a risky investment.
I personally think anything with a market cap below $100,000,000 is doubtful.
Also, you have to worry about whales.
What are Whales?
Huge aquatic mammals, that eat krill and plankton. The blue whale is the largest mammal that’s ever lived, according to biologists. Did you know that?
But actually it’s also a metaphor.
For a trader who is capable of manipulating a market. If you have a big enough share of any coin you can manipulate the price at the expense of others, especially speculators.
The usual strategy goes by the name of “pump and dump.” The whale buys until the price starts to rise quickly (that’s the “pump”) — then when investors pile in, chasing the rising price, the whale dumps some of his holding at a higher price than he bought it. He can do the opposite too, “dump and pump.” Sell lots of coin so that everyone dumps and then buy it all back at low prices.
How do you know this?
Bitter experience, young man. I know how to lose money on crypto.
I thought you were all-knowing.
My 20–20 hindsight is perfect.
So what mistakes have you made?
Lots. Not doing enough research is the main one. Sometimes I got so enthused that I didn’t do things like:
- Look on LinkedIn to find out who the executives are and whether they have a track record.
- Check the telegram channel and get involved in conversations.
- Go to Reddit.com and see what’s being said about the coin.
- Look at the price record to see if there are any signs of frequent pump and dump activity.
Getting too enthusiastic about any coin is probably a mistake all of its own.
What was your biggest mistake — aside from being dragged under by a whale?
Believing that a coin’s price was rising under its own steam rather than noticing it was rising in harmony with Bitcoin.
That’s something worth investigating, by the way, whether a coin’s price graph just follows Bitcoin’s. Most coins do to a high degree. If it doesn’t then it may be a good investment — especially if it rises while Bitcoin is falling.
Do your crypto mistakes make you smart?
Yes, just like rubbing cayenne pepper in your eyes makes you smart.
The next in the series is: What is an ICO? How Many Dead Coins Are There? Is Tezos real? (Explain Like I’m 5)
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