Three Most Important Rules in Cryptocurrency
Before you begin reading, remember to always stay curious and question everything. Always #DYOR (Do Your Own Research). Always empower yourself with knowledge. This is how I learned what I know, and part of my motivation to help others by sharing my experiences and information and making it easily digestible.
- “You are your own bank”. You are your own IT, security, portfolio manager, trader, and customer service. What this means: You control all your accounts, passwords, trades, and transfers. If you have an issue or are confused about a protocol or a change in technology, there is no 1–800 customer service number to call, and Googling might lead to more questions than answers. Crypto, like most computer functions, is rather logical and linear. However, it has a steep learning curve, and is more abstract in purpose and function, which is why many people have yet to dive in. Be extremely conscious and careful during each step of every process!!! Yes, even after three years, I still double check whenever I send currency from one account/wallet to another (that means checking the type of crypto, and wallet addresses, twice!). You can never be too careful.
- Diversify! Diversify not only your crypto portfolio, but how much of your net worth you want to allocate toward cryptocurrency as compared to other assets. VC Fred Wilson received great publicity last year when he claimed that “true believers” could allocate 10–20% of their net worth into crypto, whereas “sophisticated investors” put ~5% of their worth into crypto. This is a good rule of thumb as, similar to the stock market, being diversified can help prevent too much exposure. In the event one asset/industry takes a hit, if you stay diversified, it won’t affect your portfolio as significantly. For example, if you are starting with $100 on CoinBase, you might want to put 1/3 of your initial investment into BTC/LTC/ETH. This way, if there are any sudden negative changes in the industry that gravely affects one of the three cryptos you are invested in, it won’t make or break your portfolio as a whole.
- “Never invest more money than you can afford to lose.” This applies to all investments, but most significantly to cryptocurrency. This rule is so important because cryptocurrency is speculative in nature, has low liquidity/thin markets, a high frequency of scams, and is notoriously volatile.
Cryptocurrency is speculative because, let’s be honest, when is the last time you bought your groceries with crypto? Real world usage and adoption is happening every day and it’s exciting, but this is all still highly speculative, and nobody knows if or when it will become ubiquitous.
Low liquidity/thin market means that there are simply not as many buyers and sellers which makes it harder to buy and sell at desirable prices, and also means that prices can jump up or down even faster than higher market cap cryptocurrencies. This is why some “pumpers” will emphasize a token’s “low market cap” to entice potential investors at the possibility of exponential gains.
Scams are everywhere, since the beginning of time. Did they grow with technology and the internet? Certainly. Cryptocurrency is rife with scams. One of my main goals in creating this blog, besides educating and teaching others, is to help teach people how to spot scams. I don’t mean teaching you how to spot specific scams and traps; I want to “teach you how to fish” (no not phish!). I want to teach you how to spot scams before you even read the e-mail or click on a link. Cryptocurrencies are unique in that they are decentralized. That means there is no centralized authority to reverse a charge because you got scammed or defrauded. Once you know how the system of crypto works, and have an understanding of the ecosystem, you will be able to spot people attempting to game the system. This is why knowledge is power.
Finally, volatility is what happens when a token price goes up 50% one day, down 30% the next day, and up 20% the third day. The feeling when the price goes up feels great, but the feelings on the way down are not as great :) EQ, Risk Management, and Portfolio management are the most elusive traits in investing because they are counterintuitive to fear and greed, our most hardwired, evolutionary traits.
These are just a few examples of why you never invest more than you can afford to lose, especially when investing in cryptocurrency.
I hope you were able to learn from my Three Most Important Rules in Cryptocurrency article. If you find this information useful, feel free to share.
Disclaimer: This blog is for educational purposes only. Do not use any information provided by myself or this blog as professional/financial/legal advice or personal suggestion. Please seek financial, legal, and accounting professionals before making any financial, legal, or accounting decisions related to investing.