10 Things You Should Know Before You Invest In Cryptocurrency
Recently, many young Nigerians have started to invest a lot of their money in cryptocurrency. While a good number of them have smiled to the bank because of massive earnings from this blocking technology by trading their coins. Sadly, a pocket of people has reported having lost their money due to scammers, who invade the trading space and dupe them of their e-currency.
It will be recalled that a Nigerian student had committed suicide after he was swindled to the tune of two hundred million naira from trading Bitcoin. However, the Central Bank of Nigeria based on the advice from the Security Exchange Commission (SEC) placed a ban on cryptocurrency in Nigeria.
Going by this directive, these young Nigerian are not deterred from investing in cryptocurrency because it is one of the businesses that one can earn good money without breaking a sweat.
If you just started paying attention to cryptocurrency and are wondering whether to invest, here are 10 things you need to know before buying anything.
1. Don’t put in more than you can afford to lose
Crypto is riskier than many other investments. Nothing is guaranteed other than volatility. What’s more, it’s unregulated in most cases. There is no FDIC insurance for this stuff, nor is there a buyer of last resort. The prices of crypto coins swing wildly from minute to minute. While the market is basking in the glow of Bull Run, it has endured painful and protracted corrections and almost certainly will again.
Danger varies in degree. Bitcoin, the original cryptocurrency, has been around for more than a decade and it’s significantly less likely to disappear than most other coins. But it’s not free of risk either. Hence, don’t bet the proverbial farm, or your life savings, on any coin.
2. Research thoroughly
Before you invest a significant amount of money in any digital currency, spend hours upon hours researching the technology so you understand the value proposition and the risks. (“Someone else will buy it from you for a higher price” is not a value proposition.)
Read everything you can find on the topic. Learn section is a fine place to start, and our Research Hub can be your next stop.) Lurk on community forums and developer mailing lists. Listen to podcasts. Borrow books from the library, not only about digital currency but related fields like cryptography, game theory and economics.
3. Resist “fear of missing out”
If the only reason you’re investing in something is to avoid missing out, the only thing you won’t miss out on is losing everything. Fear of missing out (FOMO) is a sure way to destroy whatever wealth you may have accumulated over the years. The problem is that it’s a gut reaction to something that should be researched first. Trading based on your gut will quickly lead to an upset stomach.
4. If it sounds too good to be true, it probably is
Much like Wall Street, the U.S. Congress or the American Bar Association, crypto is rife with charlatans. There are more than enough people promising their project will be the one to overtake bitcoin. But is it? There’s only one way to find out: Research.
Buyer beware, but also borrower beware. Some crypto exchanges offer more than 100x leverage, meaning you can borrow up to 99% of the cost of an investment. This will juice your profits if a coin goes up in value, but if it goes the other way you could quickly be wiped out.
5. Don’t trust, verify
Scammers abound in this market. Just this past weekend, some rascals on Twitter took advantage of Elon Musk’s appearance on television’s “Saturday Night Live” to defraud people out of $100,000 worth of various cryptos with a bogus “giveaway.” Impersonating the comedy show’s Twitter account, the miscreants instructed their victims to send small amounts of crypto to verify their addresses. If they did so they would get 10 times the amount back.
6. Beware of ‘unit bias’
Just because a coin is trading around $1 does not mean it’s “cheaper” than bitcoin at $58,000. Not all coins are created equal.
There are literally thousands of cryptocurrencies, some of which seek to emulate bitcoin and some of which try to solve other issues. They all have varying levels of developer support and decentralization.
7. Not your keys, not your coins
Cryptocurrency is a bearer asset like cash or jewellery, meaning the holder is presumed to be the rightful owner. Once it’s lost or stolen it’s gone.
That is why advanced users will advise you not to entrust the cryptographic keys to a digital currency wallet to a third party, such as an exchange, because these firms are largely unregulated in many places and may be subject to hacks or exit scams (absconding with clients’ money).
8. You can buy a fraction of a bitcoin (and most other cryptos)
You don’t need to buy a whole coin. Bitcoin, for example, is divisible to the eighth decimal. So if you’re curious about how this stuff works, you can purchase as little as $10 worth and just play around with it.
As billionaire Mark Cuban recently said on television of buying small amounts of dogecoin, “it’s a whole lot better than a lottery ticket.” Unfortunately, he also encouraged viewers to spend doge on merchandise without mentioning the tax implications.
9. Understand the tax consequences
This is especially important in the U.S., for several reasons. First, the Internal Revenue Service (IRS) considers crypto property, not currency, for tax purposes. The upshot is if you buy a coin for $1 and it doubles in value and you spend that extra dollar to buy so much as a pack of chewing gum, you are required to report that capital gain and pay tax on it. There is no “de minims exemption,” despite the crypto industry’s lobbying efforts.
10. Buy using dollar-cost averaging and don’t obsess about the price
Go outside. Get some fresh air, exercise and sunshine. Spend time with your family. You can do all that AND invest in crypto.
The markets will fluctuate from day to day, hour to hour, minute to minute, but any crypto worth a damn, any investment of any kind worth a damn, is a long-term bet. If you want a dopamine hit, go for a run or watch an action movie.