Crash Course for First Time Crypto Investors

A crash course on investing in crypto currencies for those who are just getting started.

Jonathan Perez

10 minute read

Bitcoin crashing

Consider the risk

So you’re thinking about jumping into crypto (or just did recently). You’ve heard the hype, and the idea of getting rich quickly is just too good to pass up.

Before taking the plunge, consider the following: assuming little to no knowledge on an investment, investing is a literal gamble, where risks and rewards are balanced. The reason one person can get a million dollars from putting one dollar in the lotto is because there were a million other losers. Crypto is fortunately “safer” than the lottery, but there’s no shortage of uninformed investors leaving their losses and earnings up to chance.

Keep in mind, for every winner, there’s a loser. There’s no free money here. Keep yourself informed.

Don’t invest more than you can lose

This is a bit of investment advice that is often repeated, and for a reason: investing is a risk, and the possibility of losing your entire investment does exist.

Don’t just invest only what you can lose; treat the money as “lost” as soon as it’s in the coin(s) of your choice. Why? You do not want to day-trade crypto. You are here to invest, not gamble. That means holding on to your investment for months (at a minimum) or years. Don’t group your investments with your disposable income.

And remember: if you hold a coin for one day longer than a year, your investment is only taxed at long-term capital gains (maximum 20%). A single day less, and you’ll have to add all your earnings to your income.

Be wary of FUD and shilling

FUD stands for Fear, Uncertainty, and Doubt. People spread FUD when they feel they missed the boat on an investment and want to lower the price to jump in themselves. Shilling is when one spreads potentially false information to increase the value of their investments. Beware of both.

Here’s an example of each that I have personally fallen for:

Falling for the shill

My first crypto investment was in NEO, back when it was still called Antshares. It was priced above $10 a coin, and everywhere people were referring to it as “the Ethereum of China”. The subreddit dedicated to the coin was filled with “to the moon!” memes. The few articles written about it all downplayed the technology in Ethereum and claimed NEO would dethrone it that very week. Ethereum was at $300 at the time. “I could be rich,” I thought, as I fell for the shill hook, line, and sinker, and bought in at $10. The next day, it was down to $7. It bottomed at around $3 to $4 shortly afterwards.

Examples of shilling you might have seen yourself are all the articles where some celebrity is claiming with certainty that Bitcoin is going to reach $50,000 by the end of the year. Regardless of whether or not it does, I can guarantee said celebrity doesn’t know diddly.

Falling for the FUD

I’d read rumors about Ripple (XRP) being a shady coin. Someone had urged me to look into the coin, insisting that it’d be jumping to a dollar by the end of the week. It was at $0.22 at the time. I ignored their advice. Why? The rumors I’d read about. That it was associated with a shady financial institution. That it associated with people who’d scammed others. Had I looked into Ripple, I’d have found that financial institutions were intending on testing the technology to transfer funds. In two weeks time, Ripple would be at $2. I’d missed out on 10x gains because of a mere rumor which I couldn’t even remember where I’d read it.

Examples of FUD you might be familiar with include [some country] is banning crypto! First it was China, followed by China again, then Korea.

Keep yourself informed

With all the misinformation from all the FUD and shilling, it can be a bit hard to determine when information is real or not. Just remember: information does not always immediately impact the price. Dodgecoin is a parody coin, and it hit a billion dollar market cap at one point. There’s no reason for it: the github for the coin is inactive. It’s not being kept up-to-date. Everyone knows it’s a joke coin. Trading it is akin to gambling.

A coin’s development doesn’t need to be inactive to be a huge risk to invest in. IOTA isn’t just active, it’s ambitious. And yet, glaringly obvious vulnerabilities were found in its open-source code. The vulnerabilities in question have been fixed, but, to quote the article,

In 2017, leaving your crypto algorithm vulnerable to differential cryptanalysis is a rookie mistake. It says that no one of any calibre analyzed their system, and that the odds that their fix makes the system secure is low.

– Bruce Schneier

With a market cap over $5 billion, they most certainly have the resources to resolve any potential issues, but whether their judgement and code has improved is a risk I personally am unwilling to take.

Research everything you read, and make sure your investment doesn’t happen due to false information or unrealistic expectations.

Compare apples to apples

As of today, Bitcoin Cash (BCC) is over $1000. Ripple (XRP) is barely over a dollar. At a glance, it appears that BCC is worth more overall than XRP, but XRP’s market cap is actually almost twice that of BCC.

Take a look at the market caps and total supply of coins when comparing investments. If you don’t, it’s the equivalent of looking at SnapChat (SNAP) stock at $18.88 and thinking Ford (F) is a steal at $10.68, when in reality SnapChat’s market cap is $23 billion to Ford’s $43 billion.

Also note that, unlike stocks, most cryptocurrencies are divisible. That means you can spend $1000 to buy 0.1 Bitcoin, instead of having to buy 1 Bitcoin for $10,000. Key word is “most” though: some coins are indivisible, such as NEO.

Keep 90% of your assets in your own wallet

You don’t want to keep all your funds in an exchange. There’ve been enough news about exchanges getting hacked to warrant a healthy amount of distrust. You also don’t want to keep none of your funds in an exchange though. If you do, you’ll miss out on prime opportunities to sell.

10% is an amount that won’t hurt you much if an exchange is hacked (crypto can make larger swings in a day), but will also allow you to sell if your coin makes 10x gains, allowing you to pull out your initial investment while still holding long.

Don’t trade based on emotions

If you see your coin make 9x gains and you think to yourself “Holy crap, just a bit more and I’ll have made 10x gains today”, stop. Think about why the coin is jumping up so much. Is it unfounded? If so, sell a position of your investment. You made money. Just as you are thinking about the “what if” to making slightly more gains, other investors are cashing out on the incredibly high short term gains. It’s surprisingly easy to convince yourself to hold out for another 1-5% in gains to come out to a clean number, but also incredibly short-sighted.

In the same vein, don’t buy when the price is spiking up (that’s when you sell), and don’t sell when the price is spiking down (that’s when you buy). Of course, this isn’t blanket advice. Apply it only to the coins you’ve researched and are confident in. Don’t go buying Dodgecoin or FraudCoin when they start dipping.

When you sell, don’t go for all-or-nothing trades. You’re not Nostradamus. Maybe you missed something, and that jump in price is stable. Sell 10-20% of your holdings, based on your confidence of where the price will go next. You can buy back in when the price dips (or cash out to solidify your earnings). If it doesn’t drop, then you’re still making money off of the 80-90% you’re still holding on to.

Make few trades

When discussing investments, people often quote Warren Buffett. Crypto is no different, and here it is:

“We don’t own any, we’re not short any, we’ll never have a position in them. I get into enough trouble with the things I think I know something about. Why in the world should I take a long or short position in something I don’t know about?”

– Warren Buffett

There you go. That’s the only quote you should care about with regards to Warren and crypto. Keep in mind that Warren Buffet didn’t invest in Amazon, either. He only invests in what he knows about, and he has neither the need nor desire to learn about crypto.

With regards to investing, however, there are plenty of applicable (and helpful) quotes from Warren. These are my two favorite:

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

– Warren Buffett

and

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

– Warren Buffett

Almost everyone you ask will tell you to diversify your investments. This is because it minimizes your losses during downturns. The problem with this is that it also minimizes your gains, and it can cause you to lose money if you actually know what you are doing. There’s a big difference between overconfidence and actually knowing what you are doing, but that’s up to you to determine.

Whenever you hit that “buy” or “sell” button in the crypto exchange of your choice, just make sure it’s confidence backing your decision, and not fear of either missing out or losing your money.

Keep your digital wallet secure

You may have heard the term “private key” thrown around. It’s the digital signature of your cryptocurrency wallet – if someone else has access to your private key, they have access to your funds. If you are not technically savvy, you do not want to even type your private key on your computer. Keyloggers can easily steal such information. Write it down or take a picture of it with an analog camera, and put it in a fireproof safe (or your safety deposit box). Wherever you put it, make sure to include your private key and crypto assets as part of your estate.

If you are technically savvy, you can simply move the key into an encrypted drive for safekeeping (although physical storage is recommended in case your computer is lost, damaged, or compromised). Secure notes on Macs can be especially useful, since the encrypted note can be stored in Apple’s cloud without being compromised.

For smaller amounts of money, the nuances of keeping your crypto wallets safe might not be worth learning (you can learn more here). In those cases, it might be better to keep your money in the exchange you are using. If you are serious about investing in crypto, however, you need to learn about how to keep your coins safe in a software or hardware wallet. If you do not, you’re putting your entire investment at risk.

Hold long

If you are investing in crypto, you are doing it for one of two reasons:

  1. You want free money, or
  2. You believe crypto is an emerging market.

If the former is applicable to you, you’ll probably want to cash out the moment you make any money. If you don’t believe in the technology or its applications, then you’re gambling, and my recommendation is to quit if and while you’re ahead.

If it is the latter, holding long will turn out much higher gains than short holds. Remember the NEO coin I bought in at $10 due to falling for the shill? It’s over $100 today.

Do your research. Look into expert opinions on the software. Look at their target market and partnerships. “HODL” may be a meme, but holding long is a tried and true investment strategy.

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