Cryptocurrency Investing 101 — Common Pitfalls to Avoid

Hope Freiheit
Aug 29, 2019 · 11 min read
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Disclaimer: The below content is purely personal opinion formed as a result of my personal learnings and experiences, and should not be construed as financial nor business advice.

Markets go in cycles. As we’ve survived through the bear market of 2018 and transitioned to a new bull market now in 2019, I am starting to see newcomers being attracted to cryptocurrency once again. Since I am seeing new “retail investors” come into the space (including people I know personally), I think it’s time for me to sound the warning sirens to these newcomers. If you are one such newbie to crypto/bitcoin, then please read on, so you can avoid getting trapped by the common pitfalls in this space.

As with any space based on the potential for speculative profits (aka driven by human greed), the cryptocurrency investing space is filled with scammers and “influencers” who openly spew BS, all for their own personal gain at your expense. You should always do your own research (“DYOR”) and learn about the topic as much as you can, in order to avoid falling prey to the low-hanging scams and misguidance.

As a public service, in this article I will list the most common yet dangerous pitfalls faced by a newcomer to cryptocurrency investing. Before you commit capital to buy your first fractions of bitcoin (BTC), make sure you read through this list carefully and internalize each point — it just might save you some money.

1. If someone gives investment advice with 100% certainty, he/she is full of shit.

Investing is a game of chance and educated guessing, and you should immediately run from anyone who claims they know the future. This not only applies to cryptocurrencies, but practically all forms of investing.

2. The cryptocurrency market is open 24/7 unlike traditional stock markets, and it is extremely volatile.

On top of that, since cryptocurrencies are a relatively new asset class, they do not yet have the same level of liquidity as traditional assets such as S&P500 stocks or Forex. As a result, fluctuations in price can sometimes be huge and rapid, when so called “whales” (people with a lot of money) buy or sell large quantities of the asset.

With these factors in mind, try not to get addicted to checking the price of your bitcoin during every waking moment, once you have skin in the game. This will destroy your productivity and replace it with anxiety. Instead, just sit back and take a look every now and then, while keeping the long term picture in mind. You are investing, not daytrading.

3. Only use large and well-established cryptocurrency exchanges with proven track records.

The answer here is simple. Forget all the fancy promotional stuff — only go with the tried and true players. As a crypto exchange, many companies in this space are not subject to the same stringent regulations as your typical stock broker. Therefore, many little-known crypto exchanges can be very shady or poorly capitalized. There has been a number of instances where crypto exchanges (and their founders) have even pulled exit scams.

As a newcomer trying to buy your first bitcoin or fraction of a bitcoin, the only exchanges you should even consider are the established brands with openly public management teams such as Bitfinex, Bitstamp, Kraken, and Coinbase ( RefLink). Before you spend time to start registering an account and pass KYC, make sure to check if your country of residence is eligible for buying/selling cryptocurrency on that particular exchange. Eligibility for your jurisdiction will depend on where the particular exchange is incorporated and whether or not they have the legal compliance to work with customers in your country.

Also, always make sure the URL is correct, in order to avoid phishing sites pretending to be those exchanges.

4. Never trust any investment advice from mainstream media, including all financial mainstream media.

Remember that trading is a zero-sum game. For every seller there is a buyer. If CNBC is telling every Average Joe to buy a shitcoin called Ripple (XRP), then you can bet that the rich and powerful are dumping theirs behind the scenes. This is how the rich becomes richer and the poor (and uneducated) becomes poorer.

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CNBC showed its viewers how to buy Ripple when it was $2.57, at the very top of the 2017 crypto bubble. *Facepalm* If you listened to them, you lost a lot of money.

Instead, you should dig for in-depth information on your own. Spend time on Twitter, on Reddit, and read books and blogs written by people who are knowledgeable about bitcoin and do not try to sell any “get rich quick” schemes. Develop your logic and judgment, and filter the good information from the bad information. You should always analyze and make your own judgment before listening to any “expert opinion” or any stupid mainstream media narrative for explaining the latest BTC price movement. That applies to this article of mine that you are currently reading as well! Think for yourself.

Bonus: A list of several mainstream media to avoid when it comes to investing — CNBC, Bloomberg, Financial Times, Washington Post.

5. Avoid the website “Bitcoin.com”

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Bitcoin.com tries to push the altcoin called “Bitcoin Cash” on unsuspecting newbies.

6. Most altcoins are totally worthless and you should stay away from them.

The truth is, bitcoin is in a class of its own, as a truly decentralized peer-to-peer electronic money that is fungible, borderless, censorship-resistant, and has strong network effects. Its history as the original cryptocurrency and its powerful network effects enable it to have the strongest chance for survival based on the Lindy Effect. This is so certain now, in 2019, that I dare to say bitcoin will never disappear in our lifetime. It has come a long way since the days of being called an internet scam or “currency for the Silk Road”, in merely a decade.

The same, however, cannot be said of nearly all altcoins. The problem with most altcoins is that they were created by individuals for the sake of the founder’s profit. None of them are decentralized enough, with most being controlled by only one or two people — negating the only true benefit of a blockchain-based money, which is decentralization. If someone can freeze or delete a cryptocurrency at his will, then this cryptocurrency is no different from your Walmart gift card or your WeChat wallet balance. Unlike these altcoins (also known affectionally as “shitcoins”) with their Founders and CEOs and CMOs and advisors, bitcoin has none of these. The mysterious Satoshi Nakamoto dropped this genius open source protocol on the world and disappeared — anyone can code, mine, or run nodes for bitcoin.

The purpose of most altcoins (“blockchain tokens”) was simply to enrich their founders, under misguided public enthusiasm for “blockchain tech”, as these people capitalized on the knowledge gap during the 2017–2018 ICO bubble. Out of the thousands of “blockchain projects” and their associated tokens that birthed during that bubble, almost none has any tangible product or actual use case, even today. It was one of the craziest money creation and evaporation sagas in human history, and 99% of all said altcoins will slowly see their pricing trickle down to their actual value, which is zero. I would not touch them if I were you.

If you encounter people on LinkedIn or in real life coming at you with “XYZCoin is the hottest new thing, with better tech and faster speed than bitcoin, etc. and you should invest!”, run.

7. Don’t get sucked into daytrading.

Just remember that the trading market is a zero-sum game — when you are making a profit, someone else just lost money; and when you suffer a loss, someone else has taken your money. When you daytrade, you are up against professionals, seasoned traders, large funds, coordinated groups, and many electronic algorithms. It’s like going to Vegas, and can drain your balance very quickly if not careful.

Instead, remember what brought you to invest in bitcoin in the first place — (hopefully) a long term expectation of bitcoin’s adoption as a digital store of value and therefore its price appreciation.

8. If you are inexperienced with trading, do not try to time the tops and bottoms — dollar cost average (DCA) instead.

Instead, trying to time the exact bottoms (for buying) and tops (for selling) often leaves people in a state of FOMO (fear of missing out) — when they sold at what they thought was the top only to see the price rise another 20%, and they panic and buy back in at a 20% higher price. The same is true for buying what they perceive to be the bottom, only to see the price drop another 20% the next days, leading to them panic selling and losing money. It is difficult to manage your emotions in the markets, especially if you are inexperienced.

Here is a convenient tool to see what kind of returns you would have gotten, if you simply DCA’d each month into bitcoin. As the old adage says, “it’s time in the market, not timing the market.”

9. Only invest what you can afford to lose.

10. There is no free lunch in life, so don’t fall for “guaranteed return” Ponzi schemes.

Recently there was a massive Ponzi scheme that was busted in China, called Plus Token. The scammers exit scammed $3 BILLION worth of money from greedy and clueless retail investors. The funny thing was, I actually heard about it from a friend 2 weeks before they got busted by the police. I warned him that it smelled like BS, and luckily he didn’t put money into it.

11. If anyone claims to be the founder of bitcoin, Satoshi Nakamoto, he is a liar.

There have been several people who have claimed themselves to be Satoshi, with the most prominent such fraud being an Aussie guy called Craig S. Wright. Despite his absolutely ridiculous claims and total inability to provide any evidence to his claims, he managed to swindle many people to believe he was the one. Things have not been going well for him in recent times though, as more and more people have saw through his lies, and he is currently in court dealing with legal issues stemming from all his fraudulent activities.

That’s all for now. I hope these warnings will save you a few of your hard-earned dollars as you dabble with crypto. For a more thorough understanding of bitcoin, how it works, why it is so unique and has great social and economical significance, I recommend the following books: “The Bitcoin Standard” and “Mastering Bitcoin”.

Originally published at https://hopefreiheit.com on August 29, 2019.

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