What’s the smartest way of investing in cryptocurrency?
You know, three years back there was a cryptocurrency which was called “Einsteinium” (EMC2, named after the equation). You’d think this was a smart way of investing in cryptocurrency, but it completely failed (as many coins do)!
So, if you can’t rely on coins named after the smartest people ever, what is the smartest way of investing in cryptocurrency?
Well, the smartest way is also the most boring way: where you have a choice of “become an expert investor”, or “hand your funds to expert investors”!
Responsible investing: become an expert investor
Cryptocurrency has some unique features that mean there are extra questions for the smart investor to ask. For instance, “should I even invest in crypto?” is a valid question. Will it be here tomorrow? Is it all hype?
Cryptocurrency is at the very start of a merge with traditional finance and is rapidly legitimising itself. So as a sector, it’s now accepted as a valid place to invest money and get a return. There are more industry groups lobbying for transparency and honesty, and it’s never been working harder to clean up its act.
Do your research, and don’t buy the hype – either way!
There are thousands of cryptocurrencies, and many will disappoint or fail. It’s surprisingly difficult to establish the “fundamentals” of a coin, especially when its value appears to bear no resemblance to its actual prospects. This is very frustrating when you see coins with good fundamentals suffering, and hype-driven coins prospering.
Crypto still does contain a LOT of hype, delusional investors, and dishonest claims around the various coins: the worse the fundamentals of the coin, the more hype is needed. Crypto as a sector is also targeted with a lot of FUD (fear, uncertainty, and doubt), particularly by politicians with close ties to the banking industry.
So, ignore most of what you hear from politicians and the mainstream media.
One of the best sources of links to reports about cryptocurrencies is Coindesk. Of course, most reports start from the basic idea that cryptocurrency is a good thing: but that doesn’t mean the research is wrong.
You should also pay attention to who wrote an article or report. Who paid for it? Did they have an angle?
Risk comes in many forms. At the beginning of cryptocurrency, there was a non-zero chance of Bitcoin collapsing and everyone losing everything because the system would fall into disuse.
That didn’t happen. But the history of Bitcoin gives us an idea of where the risks come from in cryptocurrency. Knowing where those come from is vital for being an expert investor.
The risks come at three levels: risk to the ecosystem, risk to an asset, and risk to you.
Hacks and Exploits
Two early hacks in 2011 and 2013 on the same Bitcoin exchange (Mt Gox) had a terrible effect on the cryptocurrency ecosystem, which was basically just bitcoin at the time. A coin hack on an Ethereum smart contract also caused a lot of problems in 2015 which even resulted in the coin splitting into two!
The ecosystem is now a lot tougher to bring down: it’s bigger, and the security is better (especially at centralised exchanges). However, there are still hackers exploiting the faulty code written by people.
Wallets and exchanges are still a popular target for hackers, so it pays to find out which ones are the most hardened or used.
Keeping up with the crypto news is also a must.
Poor Programming and Design
Sometimes poor programming can result in as much damage as hackers: for instance, recently the design of the UST stablecoin (and its LUNA companion that it used as a counterweight) was cruelly exposed by some heavy-duty market action that crashed it.
Equally, a poorly programmed wallet or smart contract could just throw your funds away, with no recourse, with no need for hackers.
Useless Business Plans
It’s often said that you should “diversify” your holdings, and that can apply to crypto. But you obviously need to make sure you’re investing in coins you’ve done your research on. In crypto, buying a range of different coins doesn’t necessarily protect you from a slump in the market: all cryptos tend to move together against the dollar, with smaller coins moving most. The exception is dollar-backed USD stablecoins: if you invest in them, you really are hedging your bets!
Market manipulation is a big risk because “whales” don’t need to be hackers to game the system. They just need enough money to manipulate a coin and use it as their own personal plaything.
If groups of people get together, they can also run “pump and dump” scams. The idea is to get a group of people to all buy a coin at the same time at the same place to engineer a price rise. People not in on the scam buy the coin and raise its price still further (this is the danger of FOMO – fear of missing out). Then, the people behind the scam cash out at the top, leaving newer investors holding the bag. It’s illegal in traditional finance.
This is a problem that has lessened slightly in 2022: in 2017, a ton of companies sprang up with fictitious people and copy/pasted white papers for new coins to do ICOs: “Initial Coin Offerings”, promising the earth, the moon, and 25% of all known stars to lucky investors.
Some were honest, most were not. When the outcomes became clear and a bear market set in, the money dried up and ICOs got a bad name.
Due diligence on any company you’re going to trust is vital. Test that website. Check that the T&Cs weren’t written to Kentucky Fried Chicken. Poke. Prod.
And if all that sounds like hard work… there’s an easier way!
Well, we’re going to suggest that you use AQRU instead to do your heavy lifting. A trustworthy company that you can do due diligence on, bank-grade security, and experts behind the scenes that know their stuff. Sometimes the smart option is to find a trusted partner and rely on them.